Friday, February 20, 2009

Ilargi: Senator Chris Dodd wouldn't go on record talking about nationalizing big banks if the decision weren't already made. Despite the 2 PM EST attempts to soften the downfall fall-out on Wall Street (HEY, who's buying?), the 100% off-target multi-trillion bail-outs perpetrated so far must come to daddy to roost. So you will own your own bank. Feel better now?

Looking at those bail-outs, looking at the federal regulators, and looking at the way Paulson did TARP (last-minute U-turn), and Geithner did his bank stimulus (last minute U-turn), there is only one possible outcome going forward. They are going to screw this one up so badly they may bankrupt the entire country.

The Lehman unwind process will take 10 years or more. Senator Dodd tells us any bank nationalization will be a short-term affair. See, I don't believe Humpty Doddy. I think the US will never ever get rid of the banks anymore once they take them over. There may be valiant notions about putting bad assets in a bad bank or a side-pocket, but in order to be able to do that, you will first have to identify those assets. Again, let me spark your memory: "The Lehman unwind process will take 10 years or more".

A bank take-over will be handled through the FDIC. Which does some of the small-town bank seizings quite nicely. But do you know how large Citigrioup is? About 100 times bigger than the FDIC can handle, I would venture. Throw in Bank of America, and you have the proverbial recipe for utter mayhem.

They will turn to the likes of Robert Rubin, a Citi ex-head honcho and one of the main instigators of the entire US part of the crisis, to help find what's what at Citi. BofA CEO Ken Lewis will be asked for assistance in untangling his bank's messes. Lesis is under legal investigation. Nationalization might turn into the ultimate swig at the public trough.

These banks are far bigger than the government can handle. For that matter, they're far bigger than the government itself. We are about to witness the biggest and worst boondoggle in US history. It may come later today (though the White House tries to deny it), or it may take a bit longer. But boy oh boy, if you think the $10+ trillion burned down so far were an event, you're in for a treat. And boy oh boy, will you ever pay. Will Prince Alwaleed?

Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for "a short time" to help lenders including Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years. "I don’t welcome that at all, but I could see how it’s possible it may happen," Dodd said on Bloomberg Television’s "Political Capital with Al Hunt" to be broadcast later today. "I’m concerned that we may end up having to do that, at least for a short time." Citigroup and Bank of America, which received $90 billion in U.S. aid in the past four months, fell as much as 36 percent today on concern they may be nationalized. Citigroup, based in New York, fell as low as $1.61. Bank of America, based in Charlotte, North Carolina, tumbled as low as $2.53.

Dodd, a Connecticut Democrat, also said Treasury Secretary Timothy Geithner has "an awful lot of leeway" in interpreting the restrictions on executive compensation included in an economic stimulus bill and opposed by the banking industry. Treasury officials are still examining how to implement the new compensation restrictions and have not yet determined whether they will apply to participants in the administration’s rescue plan or only to banks and companies that get cash injections from the Troubled Asset Relief Program. Regulations resulting from the new law are expected within weeks. Compensation consultants including Alan Johnson, founder of Johnson Associates Inc. in New York, said the rules may be "catastrophic" to Wall Street’s talent base.

The caps made top- producing employees "nervous," and those who can find other jobs will probably leave, said James Reda, who heads an eponymous compensation firm in New York. "I’m sort of stunned in a way that some people are reacting the way they are about all of this," Dodd said. "At a time like this, everyone needs to pull in the same direction." Dodd also said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or a "forced merger." General Motors Corp., Ford Motor Co. or Chrysler LLC risk liquidation with such actions, Dodd said on the broadcast.

U.S. stocks tumbled, sending the Dow Jones Industrial Average below its lowest close since 1997, after Senate Banking Committee Chairman Christopher Dodd said some struggling banks may need to be taken over by the government. Citigroup Inc. and Bank of America Corp., which combined have received more than $90 billion in federal aid, slid more than 30 percent after Dodd told Bloomberg Television that it may be necessary to nationalize some banks for a short time. Europe’s benchmark index sank to a six-year low, while Japan’s Topix plunged to the lowest since 1984. Treasuries rallied and gold climbed above $1,000 an ounce as investors sought a haven from riskier assets.

The Standard & Poor’s 500 Index decreased 2.6 percent to 758.34 at 1:38 p.m. in New York. The benchmark index is down more than 8 percent on the week and less than 1 percent above its 2008 bear market low. The Dow fell 182.08 points, or 2.4 percent, to 7,283.87. "There’s so much uncertainty and a decent chance of the worst case, nationalization, that it’s complete speculation to mess with Citigroup and Bank of America," said Edwin Walczak, head of U.S. equities at the American unit of Vontobel Holding AG of Switzerland. "The price is telling you that." Vontobel’s U.S. unit manages $6 billion. Stocks dropped yesterday as Hewlett-Packard Co. cut its profit forecast and concern about rising credit-card defaults dragged financial shares to the lowest level since 1995. The S&P 500 has lost 16 percent in 2009 as companies from Microsoft Corp. to Procter & Gamble Co. reported disappointing earnings and Treasury Secretary Timothy Geithner failed to convince investors that his plan to rescue banks will work.

Yesterday’s closing lows for the Dow industrials and Dow Jones Transportation Average signal more losses to come for stocks, according to Dow Theory, which holds that shipping and travel stocks foreshadow the economy. The transportation gauge closed at five-year lows each of the last three days, led by tumbles in YRC Worldwide Inc. and JetBlue Airways Corp. Citigroup dropped as much as 36 percent to $1.77. The bank is not engaged in any unusual discussions with the government, a person familiar with the matter said today. Bank of America tumbled as much as 36 percent to $2.53. Chief Executive Officer Kenneth Lewis sought to assure his management team yesterday that the Charlotte, North Carolina- based bank wouldn’t be seized by the government, the Wall Street Journal reported today, citing a person familiar with the situation.

"The market doesn’t think the government is an appropriate manager of banks," said Kevin Shacknofsky, who helps manages $2 billion at Alpine Mutual Funds in Purchase, New York. Credit-default swaps, contracts used to protect against corporate-bond defaults, on Bank of America and Wells Fargo & Co. jumped to records while Citigroup’s climbed to the highest in three months. Wells Fargo, the biggest West Coast bank, slid 25 percent to $9.01. Dodd told Bloomberg Television that it may be necessary to nationalize some banks for a short time. "I don’t welcome that at all, but I could see how it’s possible it may happen," Dodd said in an interview with Bloomberg Television’s "Political Capital with Al Hunt" to be broadcast later today. "I’m concerned that we may end up having to do that, at least for a short time."

JPMorgan Chase & Co., the second-largest U.S. bank, slipped 7.5 percent to $19.05. Meredith Whitney, the financial industry analyst who left Oppenheimer & Co. to start her own firm, said she doesn’t expect the banks she covers to continue paying dividends at their current levels. "Most of the big banks would be lucky to break even or earn a little bit of money this year," Whitney told CNBC. Hartford Financial Services Group Inc. lost 23 percent and Principal Financial Group Inc. tumbled 8.2 percent on a UBS AG report that they are vulnerable to losses on securities tied to commercial mortgages. Newmont Mining Corp., the largest U.S. gold producer, advanced 9.7 percent to $44.73 as bullion topped $1,000 an ounce for the first time in almost a year as investors sought haven investments. Intuit Inc. rose 13 percent to $24.16 for the biggest advance in the S&P 500. The world’s biggest maker of tax- preparation software said 2009 earnings will be at least $1.78 a share, three cents more than the average analyst estimate.

"The economy’s going to be mired in a mess for quite some time," Robert Doll, who oversees $280 billion as chief investment officer for global equities at BlackRock Inc., said on Bloomberg Radio. "But with stocks down nearly 50 percent from the high, we think beginning to nibble makes some sense." Earnings dropped 33 percent on average at the 400 companies in the S&P 500 that have reported fourth-quarter results since Jan. 12, according to data compiled by Bloomberg. The period is poised to be the sixth straight quarter of decreasing profits, the longest streak on record. Health-care companies are the only group among 10 to post higher earnings. Lowe’s Cos. slid 7 percent to $15.79. The company reported fourth-quarter earnings per share of 11 cents, a penny below the consensus estimate of 12 cents, and forecast first-quarter earnings per share of 23 cents to 27 cents, also missing analysts’ estimates. Goodyear Tire & Rubber Co. retreated 8.8 percent to $5.59. Goldman Sachs lowered its recommendation for the largest U.S. tiremaker to "sell" from "neutral," saying "profit expectations still have another leg down." Bridgestone of Japan, the world’s biggest tiremaker, said net income will probably fall 71 percent to 3 billion yen ($32 million) this year as demand for new cars wanes.

WellCare Health Plans Inc. plunged 23 percent to $10.75. The company became the second managed care provider this year ordered by the government to stop enrolling new customers in Medicare- backed drug and medical plans. General Motors Corp. slid 24 percent to $1.53. Chrysler LLC may be sending a message to President Barack Obama’s autos task force by saying the "best option" for survival is a merger with the largest U.S. automaker. GM abandoned merger talks in November and said it is focused on its own survival. The cost of living in the U.S. rose in January for the first time in six months as gasoline stopped sliding and retailers tried to push through start-of-year increases even as sales slumped. The consumer price index rose 0.3 percent, as forecast, after dropping 0.8 percent in December, Labor Department figures showed. Excluding food and fuel, the so-called core rate climbed 0.2 percent, more than anticipated, reflecting gains in autos, clothing, and medical care.

Meredith Whitney, founder and CEO of The Meredith Whitney Advisory Group told CNBC that she does not want to see bank nationalizations. "There needs to be moves to disaggregate the concentration of loans from top banks," said Whitney. "But I haven’t heard anything like that going on in DC." Whitney said she is nervous about how the Obama administration has yet to address some "obvious issues."

"I think there are so many people who are so hopeful about this administration, [but] what I thought was a mistake of this proposal was it underestimated the intelligence of the American people because it was built up to be this great 'saving grace' but somebody set those expectations and there was nothing behind it." Instead, Whitney suggested that the government give loans to smaller banks to moderate the supply of credit.

"If we at least moderate the supply of credit, that will make a difference. There are some banks that didn’t get in to a lot of the mess and want a loan," said Whitney. "The problem is, they have such a small market share that the government to supercharge the regionals and allow them to have the capital to go out and acquire other banks and make loans—that would be a fabulous idea." Turning to the troubled U.S. bank names, Whitney said she would sell Citigroup's stock, adding "Citi to me is still the biggest risk position out there."

Citigroup's bond spreads widened significantly after Whitney's comments. The bank's 5 percent bond due 2014 widened 92 basis points to 938 basis points over comparable U.S. Treasuries, according to MarketAxess. The cost to insure Citigroup's debt with credit default swaps also jumped to 410 basis points, or $410,000 per year for five years to insure $10 million in debt, according to Phoenix Partners Group. The swaps had traded at 360 basis points earlier on Thursday, and closed on Wednesday at 345 basis points, Phoenix said.

Citigroup and Bank of America won’t live to see May. The government will take them over within the next 60 days. The announcement may come as soon as tomorrow evening.

If there’s one thing our readers know, it’s that ChartingStocks.net has made some bold calls in the past which seemed controversial and highly unlikely at the time. Our January 2007 post warned of the coming stock market crash at a time when the market was making new all time highs. In February 2007 we warned about the breakdown of the brokerage stocks and singled out Bear Stearns (Trading at $160), Merrill Lynch (Trading at $87), and Morgan Stanley (Trading at 78). In September 2007, we warned of a selloff in the coming weeks. The market peak and decline began 4 weeks later.

We’re going to make another bold prediction. Bank of America and Citigroup won’t live to see May. The two banks will be nationalized in the coming weeks, and we think that the announcement can come as soon as tomorrow evening (Friday evenings are when major bank announcements and failures occur).

The US government has already committed half a trillion dollars to these two firms which is more than 10 times the amount it would cost to buy and control both companies. The market doesn’t believe that $500 billion is enough to save these companies. All the kings horses and all the kings men can’t put humpty dumpty back together again.

Today both banks made fresh new lows with Citi closing at $2.51 and Bank of America closing at $3.93. The 1 year charts below show the short term price movements. You should understand that when a bank stock’s chart looks like this, even a HEALTHY bank would be in trouble. Nobody wants their deposits tied up in a company that trades at $2. The outflows of deposits from Bank of America and Citi must be catastrophic.

The stock charts and potential run on these banks are not the only basis for our opinion. The media can be an excellent investing tool if you know how to decipher the news. We don’t watch the news for the information, we watch if for THE LIE.

We play close attention to air time given to so-called “Experts” and the way the media spins the information. If you know that our mainstream media is simply a licensed PR firm for the US government, you can get vital information which you can use in trading. Always ask yourself - What opinion are they trying to insert? What are they selling? What’s the underlying agenda?

The government uses the media to float policy before the public so it can digest it. By the time the government takes the action, most people not only anticipate it but are even asking for it.

In the past two weeks there have been countless debates, op-ed’s, and even opinion polls regarding bank nationalization. The popular opinion among the establishments “Experts” is that nationalizing the banks may be the only way. Even Alan Greenspan, a LIBERTARIAN, recently said that it would be a good idea. It’s coming folks! It’s what the establishment wants. (Sidenote: They may not actually use the word nationalization, even if thats exactly what they do)

Below is the long term view of BAC and C. These stocks have made multi decade lows. Other stock charts which looked similar to these were Fannie Mae, Freddie Mac, Lehman, Bear Stearns.

What happens to the shareholder? We can only speculate that the deal would look something like the takeover of Fannie and Freddie. We believe that the common and preferred shareholders will be wiped out while the bondholders MAY be protected.

Nouriel Roubini, the New York University professor who predicted the global credit crisis, said a government-backed bank ''may crack'' as officials try to bail out their financial systems. "The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign,'' Roubini wrote on his Web site today. ''At some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system -- including deposit guarantees -- could come unglued.''

Roubini didn't identify any sovereign bank that might run into difficulty. He also said he sees a 30% chance of an ''L-shaped near-depression'' without ''appropriate and aggressive policy action'' by the US and other major economies to prevent a sovereign bank's failure. The latest data indicate fourth-quarter gross domestic product in key economies including the US, the euro zone and Japan may be worse than initially reported.

''The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production employment, exports and imports is accelerating rather than decelerating,'' Roubini said. The protracted downturn Roubini warned of can only be prevented by ``a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents (households and non-financial companies),'' he said.

Bank shares have been hammered for two days and some traders are pointing to a "slip of the tongue" Fed Chief Ben Bernanke made when answering questions at the national press club this week. When asked if he supported former fed chief Alan Greenspan's statement that some banks will have to be nationalized he said, "Whatever actions may need to be taken at one point or another, I think there's a very strong commitment on the part of the administration to try to return banks ... or KEEP banks private or return them to private hands as quickly as possible".

Up until then everyone in the government had said nationalization is not being considered. To some investors and traders, Bernanke made it sound like nationalization is much more likely. The CNBC clip of Bernanke's speech has been flying across trading desks via the internet, with viewers trying to figure out if Bernanke is suggesting that indeed there is some kind of backup nationalization plan. Fears of nationalization of banks have hammered not only the stocks of the major banks, but now the preferred shares, and noticeably in the last 24 hours, the debt has also been selling off as well, for fear it will not be protected as it has been in bailouts done thus far.

Bank of America Corp and Citigroup Inc shares plummeted for a sixth straight day on Friday, hammered by fears that the U.S. government could nationalize the banks, wiping out shareholders. Bank of America shares were down 19 percent to $3.20 in early trading, their lowest level since 1984, while Citigroup shares fell 20 percent to $2, their lowest price since the early 1990s. Both stocks have lost more than 90 percent of their value in the last year. "It's a clear sign that the markets are expecting a high probability of them being nationalized," said Mike Holland, founder of Holland & Co. "The clear expectation is that shareholders would effectively be wiped out."

The KBW Financial index was down 6.8 percent to 20.42, with Wells Fargo Co shares down 11.6 percent to $10.60, and J.P.Morgan Chase & Co shares down 6 percent Asked to comment on the rumors, Citigroup spokesman Jon Diat said in an emailed statement that the bank's capital base is "very strong" and its Tier-1 capital ratio is "among the highest in the industry." Diat added, "We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth." In London, spokesmen for Bank of America -- the U.S. largest bank by assets -- declined to comment.

Citigroup's market capitalization shrank to $11.5 billion, making it worth less than asset administrator Northern Trust Corp. Bank of America stood at $21 billion. In coming weeks, the U.S. Treasury is expected to subject up to 25 banks, with assets exceeding $100 billion each, to "stress tests" to decide which need additional capital. Support for a government move to take control of troubled banks seems to be growing. Republican Sen. Lindsey Graham, considered one of the more conservative members of the Senate, said nationalization could be an option, and former Federal Reserve Chairman Alan Greenspan said government intervention could be the least bad alternative left for policymakers.

"Right now, people are looking at the worst-case scenario, which is either a complete nationalization or Bank of America and Citi having to raise so much common equity that they dilute shareholders. It seems to me either one is a possibility," said Keith Davis, a research analyst at Farr, Miller & Washington. "There's just so much uncertainty about what's going to happen to these two companies ... No one wants to get involved with these banks," he added. Bank of America Chairman and Chief Executive Kenneth Lewis told executives at a senior leadership meeting on Thursday that Washington policymakers have assured him that the possibility of nationalizing the bank was not on the table, the Wall Street Journal said, quoting a person at the meeting.

Barclays Wealth, in a global daily note, said falling bond yields in the United States "probably reflect a rumor in markets that two American banks risk being nationalized overnight." Citigroup's bonds weakened on Thursday after bank analyst Meredith Whitney said on CNBC she would be a seller of the company's stock. Citigroup plans to sell its stake in Brazilian credit card company Redecard, sources with direct knowledge of the plans said on Friday, potentially raising 3.05 billion reais ($1.27 billion) for the U.S. banking giant. Last month Bank of America posted its first quarterly loss in 17 years, after mounting losses at recently acquired Merrill Lynch. Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets. Each bank has received $45 billion in government aid in recent months and a backstop on losses on toxic assets. The aid exceeds the banks' current market value.

Investors around the world sold stocks Friday, prolonging a market swoon that has dragged major averages down to levels not seen in years. The Dow industrials were off about 75 points, sliding to around 7380. General Electric, the industrial bellwether that also has large financial exposure, tipped under $10, falling more than 8% in recent trade. GE shares have been battered along with the banks and are off roughly 43% for the year to date. "We have fear running rampant in this market," with many investors still focused on the possibility of some bellwether companies being nationalized, said Peter Cardillo, chief market economist at Avalon Partners in New York.

Three Dow stocks considered by many traders to be candidates for such a takeover -- Bank of America, Citigroup, and General Motors -- came into the session trading below $4 and have headed even lower since the opening bell. Government officials and executives at each company have emphasized plans to get those names back on their feet as private-sector enterprises. But many market participants remain skeptical that a recovery is possible without government action that would first wipe out the equity of private shareholders. Other market yardsticks were mixed Friday, which is also the expiration date for key stock options contracts whose settlement tends to add volatility to the market. The S&P 500 Index declined 1.1%, and the Nasdaq Composite Index was off 0.3% after earlier elbowing into positive territory.

The Dow closed Thursday at 7465.95, the weakest closing level since Oct. 9, 2002. Financials again led the broader market lower as Citigroup and Bank of America tumbled on continued fears that the government's efforts to rescue the financial system may fall short. Shares of both banks ended under $4 and were falling further in early trading on Friday. Thursday's U.S. selloff carried over into Asia, where Japan's broad Topix index closed at the weakest level in over 20 years on Friday, and onward into Europe, where stock benchmarks were recently sharply lower. The FTSE 100 was down 3.1% and the pan-European Dow Jones Stoxx 50 was down by 2.7%. Traders appeared reluctant to take on any risk. Gold prices hit $1000 an ounce early Friday and were trading around $991 recently. Treasurys gained, with the 10-year note rising 24/32 to yield 2.77%. The dollar advanced across the board. March oil futures declined following a 14% leap Thursday.

In economic news, U.S. annual inflation vanished for the first time in over half a century, a government report showed, as the severe recession and sharp drop in energy prices led to a rapid reversal in price pressures. The consumer-price index climbed 0.3% in January from December, when the CPI fell by a revised 0.8%, but was flat when compared to the same time a year earlier. Embattled financial stocks continued to decline on Friday. Bank of America shares tumbled by more than 12% after it was reported that Chairman and Chief Executive Officer Kenneth Lewis was subpoenaed by New York State Attorney General Andrew Cuomo, who is investigating whether the bank misled investors over its purchase of Merrill Lynch.

Citigroup shares were down more 18%, Wells Fargo shares were off more than 11% and shares of Morgan Stanley were down by roughly 5.6%. UBS, which is being pressured by U.S. officials to disclose the identities of thousands of U.S. clients amid a probe of secretive Swiss accounts, saw its U.S. shares fall 10%. Shares in Axa fell 13% after Standard & Poor's downgraded its outlook for the French insurer to negative, predicting a material decline in profitability as the current crisis weighs on Axa's capital position. Other insurers, like Genworth Financial and Hartford Financial Services Group, also slumped on Friday. Among other stocks to watch, shares of mining giant Anglo American plunged 13% after it reported a 29% fall in profits, halted payouts to investors and said it would slash 19,000 jobs to cope with the global economic slowdown. Home-improvement retailer Lowe's lost 2.9% after it said net slid 60% amid falling sales and margins as economic pressures continued to sap consumer spending.

For the past two years, Asians and Europeans have tended to view their own financial and economic problems as largely imported from the United States. The impacts on their own economies, they reasoned smugly, would be modest and short-lived. Turns out they were wrong. Over the past two weeks, the bottom has fallen out of Asia's export economy while Europe has come face to face with a financial crisis that is as bad as ours and will probably become even worse without the kind of unified response that individual countries have so far resisted. And what does that mean for us? Nothing good. It means that our downturn will be longer and deeper than many had hoped and that we can't rely as much on export growth to pull us out of the ditch.

Basically, there are two stories to tell here about the sudden downturn in the global economy. The easiest to understand is the collapse of industrial production in East Asia, where the supply chain starts in places like Taiwan and Vietnam and moves through places like China and Japan before cars, shoes, computers and flat-panel TVs arrive at stores in the United States, Western Europe and everywhere else. According to Barry Eichengreen, an economist at the University of California at Berkeley, the 40 percent decline in Taiwan's industrial production at the end of last year was the "canary in the coal mine" of Team Asia's formidable export machine. At about the same time, Japan's exports fell 35 percent, Korea's 17 percent, and China's fourth-quarter gross domestic product was essentially flat -- no economic growth at all.

As did a number of other economists, Eichengreen told me he'd never seen declines this fast and this steep, even during the Asian economic crisis when he was working at the International Monetary Fund's war room here in Washington. It all reflects not only the sharp pullback in discretionary consumer spending around the world but also an equally sharp pullback in the flow of foreign investment that was used to build factories and shopping centers and has been an important driver of growth in the region. Demand for Asian exports will pick up again before too long, but it will be a long time before they reach the levels attained at the height of the bubble economy. And it will be longer still before foreigners will be eager to invest in expanding capacity again. Ideally, Asians would respond to this challenge by reducing their heavy reliance on exports and foreign investment and reorienting their economy more toward domestic consumption. But as Raghuram Rajan of the University of Chicago points out, that's not as simple as it sounds.

For starters, the things Asians might want to consume aren't necessarily the things they produce to export, so production would need to be reoriented and workers retrained and redeployed. And to replace the foreign investment, these economies would need to develop financial institutions that can raise and invest risk capital, which right now they don't really have. Most significantly, Asian governments would have to create safety-net programs like Social Security so people don't save so much and spend so little. In short, the Asian downturn is probably manageable, particularly now that the Chinese government has responded with a massive stimulus package. But it will take time for the region to make the necessary adjustments to get the region humming again. The second story concerns Eastern Europe. Since the fall of communism, these countries have developed remarkably quickly on the strength of their industrial exports, mostly to Western Europe. And like the Asian tigers, they benefited from direct investment and credit by multinational companies and Western banks.

Unlike the Asians, however, Eastern Europeans didn't save a lot of the money they earned from exports. After years of living under communism, they were eager to catch up to Western European living standards. So they spent their earnings -- and then some -- borrowing heavily in foreign currencies to finance the accoutrements of middle-class life. They also wanted more and better government services, some of which were also financed through government borrowing. Now, with Western Europe in recession, demand for Eastern European exports has suddenly dried up, and even the companies with orders to fill find it impossible to get the working capital they need. As in Asia, plants are closing, unemployment is rising and stock prices are nose-diving. What is different from Asia, however, is that the exchange rates of local currencies have also plunged, which means the cost of paying back all those loans denominated in foreign currencies has suddenly become 20, 30, even 40 percent more expensive. Not only are households and companies defaulting, but a number of countries are also in jeopardy of defaulting on their sovereign debt.

As we've all learned, this isn't just a borrower's problem. It's also a problem for the lenders -- in this case, major banks in Western Europe that, collectively, have about $1.6 trillion in outstanding loans to Eastern Europe. What makes the situation particularly fragile is that many of these highly leveraged European banks don't have a financial cushion against losses of this scale. In big countries such as France and Germany, the government can probably afford to step in and recapitalize troubled banks, much as the U.S. government has done with Citigroup. But in smaller countries with big banking sectors -- Austria, Italy, Ireland, Belgium, Sweden and the Netherlands -- the exposure to troubled loans is a sizable percentage of GDP. In those cases, any government rescue would cripple the economy, as it has in Iceland. Economist Ken Rogoff of Harvard University sums up the European situation this way: Because Eastern Europe moved too quickly to try to raise its living standards to converge with those of the West, it is now the living standards of the West that are about to converge with those of the East.

The obvious solution is for European nations to pull together, with each contributing to a TARP-like program to rescue systemically important banks. And as finance ministers from Eastern Europe recommended recently, the European Union should set up a facility to rescue countries in danger of defaulting and taking the common currency down with them. But this is Europe, so you won't be surprised to learn that things seem to be moving in the opposite direction. Leading politicians in Western Europe have vowed they will not ask their taxpayers to bail out other countries or their banks. And other countries are threatening to follow the lead of France, which last week threw a financial lifeline to Peugeot and Renault on condition they make their job cuts somewhere else. Meanwhile, European banks are said to be quietly pulling capital out of their subsidiaries across the continent and bringing it home. If allowed to continue, this kind of financial protectionism will set the European economic project back a generation and suck all of Europe into a deep recession. That would be bad news for Team USA.

A leading US economist has called on the Federal Reserve to target an inflation rate of 5pc to 6pc over the next two years to erode the debt burden and slow the pace of job losses. Professor Kenneth Rogoff, former chief economist of the International Monetary Fund, said the threat of debt deflation called for revolutionary measures as an insurance policy. "Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation," he told the Central Banking Journal. The Fed has shifted tentatively to an inflation target, but one anchored nearer "stability".

A number of economists have begun to make similar calls for a radical shift to deliberate monetary debasement, although few have gone as far as suggesting 6pc. Such proposals cause a furious political reaction because they amount to a forced shift in wealth from savers to debtors. Prof Rogoff – one of the few economists who recognised the gravity of this crisis early on – admits that his policy is fraught with danger because it could lead to an overshoot down the road, "ending up with 200pc inflation". But there may be no choice at a time when the financial system is "melting down". The Bank of Japan failed to act fast enough in the 1990s because it was "paralysed by fear" that aggressive monetary stimulus would get out of hand. Prof Rogoff said big fiscal packages have a role to play in backing up a zero interest rate policy and ensuring that consumption does not collapse as house prices plummet, but the key is "determined monetary policy". There are no good options at this late stage after years of errors. Standard monetary relationships have broken down. "Policy is in effect flying blind," he said.

Bank of America Chairman and Chief Executive Kenneth Lewis was issued a subpoena by New York State Attorney General Andrew Cuomo, who is investigating whether the bank withheld information from investors in violation of state law, according to people familiar with the matter. Mr. Lewis, who received the subpoena late last week, is the highest-profile subject of Mr. Cuomo's investigation into the Charlotte, N.C., bank's purchase of Merrill Lynch & Co. on Jan. 1. Mr. Cuomo's office is trying to determine if investors were misled about the depth of Merrill's losses in late 2008 and whether details of the bonuses to Merrill employees, contained in a nonpublic document, should have been disclosed to investors. A BofA spokesman declined to comment on the subpoena.

Investigators also took testimony from former Merrill CEO John Thain on Thursday. Mr. Thain was questioned all day, say the people familiar with the matter. They asked Mr. Thain about the nature of some $4 billion in bonuses to employees. In particular, they wanted to know why the September merger agreement contained a nonpublic attachment that outlined the maximum Merrill could pay. A Thain spokesman declined to comment. The person close to the matter said regulators are turning their attention to Mr. Lewis and are looking at his testimony to Congress earlier this month when he said he had "no authority" over bonuses given they were detailed in the merger agreement and part of the bonuses were paid in Bank of America stock.

Mr. Cuomo's investigators are exploring how Merrill could have set and then informed employees about the bonuses before the quarter closed, according to a person familiar with the matter. They are probing whether trading losses were adequately disclosed to shareholders and boards of each company and what the top executives approving the bonuses knew about the losses. Many of these issues are typically investigated by the Securities and Exchange Commission. But as the chief regulator in Wall Street's home state, Mr. Cuomo has wide powers to look at wrongdoing in the securities industry.

Bank of America chief administrative officer J. Steele Alphin and Andrea Smith also were subpoenaed. Ms. Smith was involved in setting compensation of several top Merrill executives. Bank of America shares fell another 14% Thursday, closing at $3.93 amid recurrent fears the bank could be nationalized. Mr. Lewis addressed the nationalization speculation during a senior leadership meeting Thursday at the bank's headquarters, according to a person there. Policy officials in Washington have assured Mr. Lewis that such an option isn't on the table, the CEO said. He also said he has urged the government to say this publicly.

The federal government is most likely to create a safety net for the falling housing market with a plan that will allow people to stay in their homes by reducing their monthly payments. The FDIC and some members of Congress assume that residential real estate prices will decline slower this way and eventually begin to increase in value if houses are kept out of foreclosure. That may be true, but the plan could be quickly flanked by rising unemployment and the realization by people who can stay in their homes with federal help that they will never have the equity to pay down their principle. The government will have pushed them into the equivalent of "interest only" loans.

The first economic reality which makes propping up the housing market untenable is that unemployment is likely to rise sharply between now and the end of the year. By some estimates it will go over 9% in early 2010. While the government helps some people stay in their homes, the overall housing market could be overrun by foreclosures driven by job losses. Under these circumstances the value of homes will continue to fall. And as prices decline, the current homeowner rescue plan will keep people in their houses using mortgage assistance programs without helping them pay down the principle on their loans. These balances will get further out of touch with the overall market each day as the economy goes through a natural cycle. At least allowing them to go into foreclosure would permit the housing market to fall based on the fundamentals of supply and demand.

Although it is counterintuitive, the best approach to reversing the falling prices of homes may be to push the housing market to a deep trough as quickly as possible. This would mean that the government would not provide any assistance for current homeowners and give no financial aid to people who might buy a residence using tax credits. The idea of a benefit of up to $15,000 for those purchasing a home has already been floated in the debates over the stimulus package. Bringing housing back to a period of "affordable" prices means the government needs to stay out the business of keeping homes from being sold or foreclosed and helping buyers buy homes.

Slowing foreclosure rates by cutting the monthly interest rates of homeowners who could not otherwise afford their mortgages may actually string out the amount of time it takes for housing prices to reach a nadir and swing up again. A homeowner with a $300,000 mortgage on a house which is worth only $200,000 will keep that house off the market if at all possible, to avoid having to come up with $100,000 to subsidize a sale. That house sits in limbo while the government makes the monthly mortgage payment low enough to keep it in the hands of its owner. Excess home inventory growth is artificially arrested because residences which would normally be for sale are kept off the market.

It seems especially cruel to push foreclosures because no one wants people to lose their homes. But, at some point, the system must take into account the fact that many of these people cannot afford their houses. The irony of allowing current owners to stay where they are is that they will never really "own" a home. They will remain in houses where they are very unlikely to be able to pay off the principle. These residences will not be released into a market where prices continue to drop very rapidly because there are no government programs to keep the housing prices at or near current levels as people are pushed out of work.

If enough people lose homes, some of them will at least have the opportunity to buy property that they can afford, property which has reached its economically "correct" level through the forces of the market and not through a system that manages prices. The weakest part of the market has become gangrenous. Unless it is removed, this infection will continue to spread to the rest of the body. Housing prices have to get to the bottom as fast as possible in order for buyers to enter the market of their own accord. In a economically rational market, people can then have the opportunity to own homes that they can actually afford.

The U.S. government should just get out of the way and allow the crash in U.S. housing. The market is too big, has too far to fall and Americans' finances are too strained. President Barack Obama's measures announced Wednesday are part of a $275 billion plan to try to stabilize the housing market and prevent foreclosures. It aims to encourage lenders and their agents to cut repayments for homeowners who are in difficulties to lower, more affordable levels, as well as other steps. The reasoning is that there is a largish group of borrowers in the real estate market who may slide into default because their loans are too big and expensive or because they have run into temporary cash flow issues. Give them a cheaper loan and you break the circuit of foreclosures leading to the arrival of more stock on the housing market, which drives prices down further and gives other mortgage borrowers more incentive to walk away from their debts.

There may be some who are successfully helped out of their troubles, but they will be outnumbered by those who will only default again, or even worse - in some ways - by those who keep paying on an asset that is not worth the underlying loan."You probably have about two to three million homes that we overbuilt," said Paul Miller, a banking analyst at FBR Research. "A lot of those have to be converted to rental units." "We overbuilt on the high-end of the market," he said. "We just don't have enough people in this world who can afford these high-end homes. Government should just get out of the way." While the math often cited is that a repossession and sale can cost a lender 50 percent of the value of the loan, that rather attractive number hides the fact that modifying loans successfully is just very difficult.

Data from the U.S. Office of the Comptroller of the Currency show that more than 53 percent of loans modified in the first quarter of 2008 had defaulted again within six months. Nearly 36 percent went bad within just three months. And this was when the U.S. economy was in better shape than it is today and unemployment lower. Now it may be that those modifications were given to the wrong people and under the wrong terms, and it may also be that the new plan makes that all right. But I doubt it. The Mortgage Bankers Association did a study in 2008 that found 70 percent of foreclosures were on properties either not occupied by owners, involved borrowers who could not be found or did not respond or involved borrowers who had already had a modification and were defaulting again. Of the 30 percent not in those categories must surely be quite a few of the repeat defaulters of tomorrow.

The housing rescue plan is, in part, an attempt to rescue banks, whose balance sheets will be further undermined by drops in house prices and defaults causing many more failures. The bottom line is that many Americans who have mortgages would be better off renting. American consumer balance sheets are incredibly stretched. The average American has perhaps 30 percent of the equity in his house, but that figure hides the people who own their homes outright, thus leaving a huge rump, especially at the bottom end, who have very high loans-to-value. About 28 percent of mortgage borrowers now owe more than the value of the houses, according to Zelman & Associates. And with equity stocks down 45 to 50 percent, their assets have shrunk more alarmingly, making them less good risks.

There is an absolutely credible argument that many Americans, particularly less well-off ones, would be better off out of home ownership entirely. They would rid themselves of the yoke of a mortgage on an asset that even after a principal write-down, might not end up being a good investment. "They are going to try and keep you in a home that arguably you don't want to be in," said Ivy Zelman, a housing analyst who was early in identifying the issues. "You might be able to go up the street and rent for half the price." A person paying rent and with the flexibility to move to where there are jobs is better off than one anchored to an underwater mortgage in a community with high unemployment, even if the lender has to go bust in the process. Prices of housing in the United States were driven too high by too much leverage, even as supply increased. Let's accept that, allow prices to fall and the banks to fail and start again on a new stable footing.

Is there anything more heartless than foreclosing on a home and throwing a family out on the street? How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors? Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes. It is almost certainly bound to fail. Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling. And the impulse of any caring President must be to do something, almost anything to keep the dream alive. But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?

Real estate is simply too complex to be manipulated by anything but the "invisible hand" of the market. Disagree? Just read the four page White House Executive Summary with its laundry lists of programs, federal and state bureaucracies, conditions and caveats. It’s confusing stuff even for the average MBA. How will it be digested by the average low-income subprime borrower? Here’s the loan modification process:

"For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent…"

Again, that’s the Executive Summary. Can you imagine the chaos of a loan modification meeting between a subprime borrower and a bank officer? Multiply that a few million times — and that’s the $75 billion "homeowner stability initiative." That’s if Obama is lucky enough to find the 3 to 4 million "responsible homeowners" he thinks would qualify or want to qualify for the government moolah. But he’s almost certainly overestimating the number of "responsible homeowners" out there. Those 3 to 4 million "responsible homeowners" are actually "credit challenged" borrowers. They put down very little money to purchase homes at very inflated prices. Not only do they hold no equity in their homes today. Even with a modified loan, there is only a remote prospect of building equity in the future.

For most, economic self-interest says to walk away from the house rather than carry a modified mortgage that will suck up 31% of monthly income. Truth is, many of the "credit challenged" borrowers won’t even get to running the numbers. They simply will have no interest in sitting down with a bank officer and going through pay stubs and tax returns. Income verification? Are you kidding? That’s why many took the subprime mortgage in the first place. That millions of homeowners were and are "irresponsible" is a harsh truth that Obama can’t really talk about. In his America, the Obama housing plan is one neighbor helping another who is simply down on his luck. If only his America were real. Then maybe his program would actually work.

Fannie Mae and Freddie Mac won't need congressional approval to assist with an Obama administration initiative to refinance millions of borrowers who owe more than 80% of the value of their homes, the mortgage lenders' regulator said Friday. Such assistance "would be a proper exercise of their existing authorities," the Federal Housing Finance Agency said in a statement. The charters for Fannie and Freddie expressly prohibit them from guaranteeing or buying mortgages with loan-to-value ratios above 80% unless the borrower has mortgage insurance or the loan originator retains 10% of the risk. But the Obama housing plan contemplates allowing borrowers with mortgages above the 80% loan-to-value threshold to refinance into another loan backed by Fannie or Freddie without purchasing mortgage insurance.

In a letter to a private-mortgage insurance industry executive, FHFA Director James B. Lockhart argued that the program would be permissible under the each firm's government charter because it doesn't increase their risk. "In fact, credit risk would be reduced because, after the refinance, the borrower would have a lower monthly payment and/or a more stable mortgage payment," Lockhart wrote in the letter to Mortgage Insurance Companies of America Executive Vice President Suzanne Hutchinson. The letter was released by FHFA. The administration's goal is to allow homeowners who have seen their home value plummet to take advantage of low mortgage rates without paying mortgage insurance premiums. Mortgages with loan-to-value ratios of up to 105% would be eligible under the program, which the administration estimates would help 4 million to 5 million people to refinance.

Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest. About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, a percentage reached within 10 months and the fastest since at least 1992, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. That’s almost twice as quickly as 2007 and a level 2006 owners haven’t attained after almost three years.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off. "The biggest influence in rising delinquencies is related squarely to the economy rather than poor underwriting," said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey-based mortgage research firm. "We are apparently all suffering to some degree. It’s certainly more severe for some but still, it’s pretty much widespread."

U.S. joblessness reached a 25-year high in January while the unemployment rate in the financial industry rose to 6 percent from 3 percent a year ago. It jumped to 10.4 percent from 6.4 percent in the category of professional and business services, according to the U.S. Bureau of Labor Statistics in Washington. About 1.92 percent of homeowners with 2008 mortgages backed by Fannie Mae and Freddie Mac fell at least 60 days behind, LPS Applied Analytics said. Jumbo loans are bigger than what the two government-chartered agencies buy or guarantee, currently $417,000 in most places and as much as $729,750 in areas with higher home prices. The average credit score for 2008 jumbo loans was 762, LPS Applied Analytics said. Such scores are used to assess risk.

Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly amount since Inside Mortgage Finance started tracking that data in 1990. In 2007, jumbo loans made up 14 percent of total U.S. mortgage originations, according to the Bethesda, Maryland-based publication. The top five U.S. jumbo lenders -- Chase Home Finance LLC, Bank of America Corp., Washington Mutual Inc., Wells Fargo & Co. and Citigroup Inc. -- originated a combined $55.3 billion in jumbos in 2008. They lent just $4.3 billion of that during the last three months of the year, according to Inside Mortgage Finance.

Banks don’t want to make jumbo loans because holding them on their books means they have to keep sufficient money in reserve in case borrowers quit paying, Inside Mortgage Finance Publications Chief Executive Officer Guy Cecala said. The national average for a 30-year fixed-rate jumbo mortgage was 6.57 percent this week compared with 5.34 percent for a conforming loan, according to White Plains, New York-based financial data provider BanxQuote. The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points "for several decades," according to BanxQuote CEO Norbert Mehl.

In August 2007, that difference jumped to as much as 200 basis points and has stayed between 100 and 200 basis points, Mehl said. A basis point is equal to 0.01 percentage point. The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data. "The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for," Mehl said. "Some lenders quote a jumbo rate but they don’t make the loans." President Barack Obama’s Homeowner Affordability and Stability Plan, announced this week, has no provision to help jumbo mortgage borrowers.

Steve Habetz, president of Threshold Mortgage Co. in Westport, Connecticut, said he relied on Hudson City Bancorp Inc. in Paramus, New Jersey, and closely held, Manhasset, New York- based Apple Bank for Savings for jumbo loans. Capacity is down because lenders everywhere are understaffed and "drowning in loan applications," Habetz said. Habetz said he had a customer with a 740 credit score who had a down payment of $500,000 on a $1 million home in Easton, Connecticut. The borrower had to wait two weeks for approval when in December he would have gotten the mortgage overnight. "Mortgage lending right now is like wading miles and miles in waist-deep mud," Habetz said. "It’s so difficult. Jumbo borrowers will be tortured and it’s nothing they should take personally because everybody is getting tortured."

If Bush’s strategy for dealing with the banking and housing crises was to bury his head in the sand, Obama’s strategy has been to bury his head even deeper. The housing crisis, like the banking crisis, isn’t going to be "solved" until asset prices are allowed to fall. The Bush administrations, in concert with the Fed, had a simple strategy: throw good money after bad in order to prop up asset prices, protecting failed homedebtors and bankers from absorbing their losses. Obama has simply doubled-down on the same strategies. Literally.

The key part of Obama’s housing plan announced yesterday is to subsidize mortgage payments, reducing effective interest costs in order to put a floor under asset prices so banks and homeowners don’t have to declare bankruptcy. Naturally banks love the Obama plan. By subsidizing monthly payments, and not forcing banks to write down principal by more than a token amount of $1000 per year for 5 years, the plan will keep homedebtors tethered to vastly overpriced mortgages. Who does this really benefit? Not the homedebtor, who has little chance of ever building equity in the home. He’s effectively paying over-priced rent to a bank. No, the banks are the real beneficiaries.

How does subsidizing mortgage payments prop up house prices? And how does this benefit banks? Well, if homedebtors who would otherwise walk away from an underwater property can be convinced to keep making their payments, then banks can continue to treat the mortgage as a "performing loan," which means they don’t have to write it down. The bank’s capital doesn’t suffer and the bank survives. Sort of. Capital levels are far more depleted than the official balance sheet figures suggest, of course, so the bank is basically walking dead. Hence the term "zombie bank."

Luckily, fair-value accounting gives the lie to such accounting shenanigans. Investors know many "performing" mortgages have a high probability of default. They have no interest in valuing these mortgages at the fictitious value banks would like to pretend they are worth, so buyer bids evaporate and the market stops functioning. But even banks can’t keep up this fiction indefinitely. As time goes on, sellers will be forced to "hit the bid" that is actually available in the market. Also, as unemployment rises, many borrowers previously categorized as "performing" will default, forcing banks to write down the mortgage. In other words, the market will eventually win. Prices will fall and the banks will be put out of business.

Accounting gimmickry facilitated by Obama’s "foreclosure relief" plan will protect banks only temporarily. To survive the crisis, the banks need more. They need the government to blow a bubble to replace the one that’s bursting. In the short-run, TARP money and accounting gimmicks can keep them in business. In the long-run, they need the Fed to reinflate prices. Did I mention that loan modifications like Obama has in mind don’t work? Here’s a chart showing the re-default rate on modified mortgages. As you can see, a majority fall back into default within 60 days.

The data do not auger well for Obama’s foreclosure relief plan. If he really wanted to keep homeowners in their homes, he’d have to get lenders to write down principal. They won’t voluntarily do that of course. So Obama would have to just cut a check directly to them to subsidize the write-down. Such a direct transfer from non-homeowners to homeowners would be enormously unpopular politically.

President Obama's housing plan is designed to save "responsible" homeowners from foreclosure by having taxpayers subsidize their mortgage payments. The problem is, how do you define "responsible?" In his speech, Obama said his plan "will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford." It should be fairly easy to identify speculators who bought homes to rent or flip. But how do you prove someone bought a home they knew they couldn't afford?

I've spoken with many people who can't pay their mortgages and are desperate for help. All bought homes they thought they could afford and in many cases really could afford. Most got into trouble by refinancing their homes - often more than once - and extracting every possible dollar of equity. The money went toward granite countertops, stainless steel appliances, credit cards, student loans, vacations, weddings, cars, etc. Then came a job loss or a divorce or the roommate moved out, and suddenly they couldn't make the payment. They tried to sell or refinance but couldn't because the home's value had dropped below the loan balance. Responsible or reckless? Who's to say?

Obama announced two new plans for "responsible" homeowners who want to reduce their mortgage payments. Neither excludes people who cashed out their equity. Both are open only to people whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac, which essentially have become arms of the government. The first will help homeowners who want to refinance at a lower rate but can't because they owe more than 80 percent of the home's current value. The plan will let them refinance through Fannie or Freddie as long as the loan does not exceed 105 percent of the market value. To qualify, homeowners must be current on their mortgage payments.

Obama said this program's cost to taxpayers "would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures." The second plan posses a far greater cost to taxpayers. It will use $75 billion from the Troubled Asset Relief Program (renamed the Financial Stability Plan) to modify loans for "households at risk of imminent default despite being current on their mortgage payments." I'm not sure what that means. Some of the money will go to loan servicers who get customers in modification plans. Some will go directly to homeowners in the form of mortgage subsidies and rewards for continued payment. Borrowers who stay current can get a bonus of up to $1,000 a year for five years.

Who qualifies for this windfall? The details are still being worked out. Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley, says it should exclude people who lied on their loan applications. And in assessing the borrower's ability to pay, the government should look at assets, not just income - the same way it does when people apply for welfare or college aid. Past mortgage-modification plans have not had an asset test. A homeowner could have a Lexus in the driveway and a half-million in retirement accounts and still qualify if his income was low enough. The White House says all homeowners will benefit from the plan because without it, the average home price would fall an additional $6,000.

How does that benefit people who pay taxes but don't own a home? And how about all those renters who refused to buy an overpriced home with an exploding loan? The percentage of households that could afford an entry-level home in California soared to 59 percent in the fourth quarter of 2008 compared with 33 percent the same period a year ago, the California Association of Realtors said Wednesday. In the Bay Area, the index jumped to 47 percent from 23 percent, thanks largely to a drop in home prices. Although the stimulus plan provides a tax credit for first-time home buyers, some might like to see prices come down even more.

Its best projection—a return to profitability by 2011—hinges on a massive, unlikely sales rebound. When President Barack Obama's task force sits down to peruse General Motors' (GM) recovery plan, they'll need to scrutinize its underlying assumptions. Yes, a chastened GM has gotten religion. But Detroit has long ginned up rosy projections only to miss them by a mile. Under GM's best-case scenario, the company will be back in the black in two years and will have paid back taxpayers by 2014. A lot of things will have to go right for that to happen. If not, GM will have to dig even deeper and ask the government for yet more money. GM is basing its speedy payback plan on the assumption that Americans will ramp up their car-buying rate to 18.3 million annually by 2014. That's 500,000 more than they bought in 2000 when sales hit an all-time high. Back then, the economy was strong and automakers handed out cheap loans to just about anyone with a driver's license. Such conditions are unlikely to arise again soon.

This year automakers will be lucky to sell 11 million vehicles in the U.S., and Chrysler, in its own plan, figures overall sales will not exceed 13 million in 2014. If that's the case, according to GM's own calculations, it won't have paid off taxpayers in five years. Rather, it will have to borrow more and owe taxpayers $30 billion. To GM's credit, it acknowledges in the plan that it will lose ground to rivals over the next five years—something the carmaker has been loath to admit until now. GM says its North American share will drop from 21.1% to 19.1% by 2014. But the company will have to fight to prevent its share from falling below 19.1%. Everyone agrees GM should sell or shutter Saab, Saturn, and Hummer while shrinking Pontiac to a couple of niche sports cars. But those four brands account for 3.8% of the market now. So GM would have to get about half of those buyers into its remaining makes. The company has plans to make that happen. In one case, GM will essentially replace Pontiac's big seller, the midsize G6, with a Buick and sell it in the same Pontiac-Buick-GMC showrooms. But keeping those buyers once their brand has disappeared won't be easy. One thing GM can't really calculate is its future pension obligations.

In the strategy it submitted to the government, the carmaker estimated its U.S. pension plans are underfunded by $12.7 billion. And if the stock market doesn't recover, GM acknowledges, it may have to pump $12 billion into its pension fund by the end of 2014. Doing so could force the company to borrow more money as well as slash budgets for new models, product development, and marketing plans—all essential if GM is to make a comeback. GM's plan states that if sales rebound to more than 14 million a year in two years, it will earn an operating profit of $5.1 billion in 2011. And in the worst case? "There would be a significant debt balance," GM Chief Financial Officer Ray G. Young conceded to analysts in a conference call. "It's frankly not sustainable. We would take some pretty draconian measures." And the Administration would have to decide whether to give GM even more money or force it into bankruptcy.

First, Arthur Santa-Maria called Bank of America to ask how to check the balance of his new unemployment benefits debit card. The bank charged him 50 cents. He chose not to complain. That would have cost another 50 cents. So he took out some of the money and then decided to pull out the rest. But that made two withdrawals on the same day, and that was $1.50. For hundreds of thousands of workers losing their jobs during the recession, there's a new twist to their financial pain: Even when they're collecting unemployment benefits, they're paying the bank just to get the money — or even to call customer service to complain about it.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JP Morgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards. Some banks even charge overdraft fees of up to $20 — even though they could decline charges for more than what's on the card. "They're trying to use my money to make money," said Santa-Maria, a laid-off engineer who lives just outside Albuquerque, N.M. "I just see banks trying to make that 50 cents or a buck and a half when I should be given the service for free."

The banks say their programs offer convenience. They also provide at least one way to tap the money at no charge, such as using a single free withdrawal to get all the cash at once from a bank teller. But the banks benefit from human nature, as people end up treating the cards like all the other plastic in their wallets. Some banks, depending on the agreement negotiated with each state, also make money on the interest they earn after the state deposits the money and before it's spent. The banks and credit card companies also get roughly 1 percent to 3 percent off the top of each transaction made with the cards. "It's a racket. It's a scam," said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.

Neither banks nor credit card companies will say how much money they are making off the programs, or what proportion of the revenue comes from user versus merchant fees or interest. It's difficult to estimate the profits because they depend on how often recipients use their cards and where they use them.But the potential is clear. In Missouri, for instance, 94,883 people claimed unemployment benefits through debit cards from Central Bank. Analysts say a recipient uses a card an average of six to 10 times a month. If each cardholder makes three withdrawals at an out-of-network ATM, at a fee of $1.75, the bank would collect nearly $500,000. If half of the cardholders also dial customer service three times in any given week (the first time is free; after that, it's 25 cents a call), the bank's revenue would jump to more than $521,000. That would yield $6.3 million a year.

Rachel Storch, a Democratic state representative, received a wave of complaints about the fees from autoworkers laid off from a suburban St. Louis Chrysler plant. She recently urged Gov. Jay Nixon to review the state's contract with Central Bank with an eye toward reducing the fees. "I think the contract is unfair and potentially illegal to unemployment recipients," she said. Central Bank did not return two messages seeking comment. Glenn Campbell, a spokesman for Rep. Russ Carnahan, D-Mo., said the congressman would support a review of the debit card programs nationwide. Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still use traditional checks or direct deposit.

With the national unemployment rate now at 7.6 percent, the market for bank-issued unemployment cards is booming. In 2003, states paid only $4 million of unemployment insurance through debit cards. By 2007, it had ballooned to $2.8 billion, and by 2010 it will likely rise to $10.5 billion, according to a study conducted by Mercator Advisory Group, a financial industry consulting firm. The economic stimulus plan signed by President Barack Obama this week will increase federal unemployment benefits by $40 billion this year. Subsequently, there will be more money from which banks can collect fees. The U.S. Department of Labor allows the fees as long as states create a way for recipients to get their money for free, spokeswoman Suzy Bohnert said. "Beyond that, the individual decides how to manage his drawdowns using the debit card," she said in an e-mail.

A typical contract looks like the agreement between Citigroup and the state of Kansas, which took effect in November. The state expects to save $300,000 a year by wiring payments to Citigroup instead of printing and mailing checks. Citigroup's bill to the state: zero. The bank collects its revenue from fees paid by merchants and the unemployed. "If you use your card the right way, you're not going to pay fees at all," said Paul Simpson, Citigroup's global head of public sector, health care and wholesale cards. But that's not always practical. Santa-Maria, the laid-off New Mexico engineer, said he didn't pay any fees the first time he was laid off, for several months in 2007. His unemployment benefits were paid by paper checks. He found a new job last year but was laid off again last fall.

This time, he was issued a Bank of America debit card — a "prepaid" card in industry lingo — but he was surprised to learn he had to pay fees to get his money. He asked the bank to waive them. It said no. That's when Santa-Maria called back to ask how to check his account online. He logged on and saw that the call cost him a half dollar. To avoid more fees, Santa-Maria found a Bank of America ATM at a strip mall and withdrew $80 at no charge. When he got back to his car, he decided to take out the rest of his money — $250 — and deposit it in his bank account. Afterward, Santa-Maria logged on to his account and saw a charge of $1.50 for two withdrawals in one day.

New Mexico authorities bargained with Bank of America to get lower fees for unemployment recipients, said Carrie Moritomo, a spokeswoman for the state Department of Workforce Solutions. The state saves up to $1.5 million annually by not printing checks. Bank of America spokeswoman Britney Sheehan pointed out that the fees charged in New Mexico are similar to those charged in the 29 other states with unemployment debit cards. "We worked with the Department of Workforce Solutions and believe the fee schedule is reasonable and consistent with similar programs," she said. Banks could issue unemployment debit cards with no fees for cardholders, but that would likely mean that states would have to pay more of the administrative costs, said Mark Harrington, director of marketing for Citigroup's prepaid card services. If a state demanded no cardholder fees and could pay the difference, Citigroup might enter such a contract.

"We would be open to that," Harrington said. "We're not looking to structure any programs where we would lose money, but we're definitely flexible." Simpson noted that the cards can save money for jobless workers who have no bank accounts. In the past, these people had to use corner check-cashing shops that charged fees as high as 2 percent, or $6 for a $300 check. Now, they can swipe their cards at McDonald's, Wal-Mart or elsewhere for free. Kenna Gortler, a laid-off paper mill worker in Oregon, said her union is advising members to avoid the debit cards and sign up to get their benefits through direct deposit. More than 300 of her fellow workers have lost their jobs at the mill in the last three months, and horror stories about ATM fees and overdraft charges are starting to filter back to others who are just now signing up for their benefits. "It's discouraging," Gortler said. "People have limited funds and they don't need to be giving money to the banks. They need to be keeping that money to feed their families and pay bills."

With credit markets still shaky, about $171 billion in loans backed by offices, shopping centers, hotels and other commercial buildings are coming due this year. Experts increasingly wonder whether there's enough credit capacity in the system to refinance them. Yesterday, at a conference sponsored by the Burnham-Moores Center for Real Estate at the University of San Diego, bankers and real estate experts tried to tackle the crucial questions facing the market. Two of them were: When will the credit freeze thaw, and what can commercial landlords expect when dealing with lenders? The overall message was that it's too soon to know. Too much uncertainty remains over the direction of the economy and federal efforts to shore it up.

For months, experts have been saying commercial buildings will be the next shoe to drop in a real estate-led downturn that began with toxic subprime home loans and has spread to every sector of the economy. One reason for concern is that the market for commercial-mortgage-backed securities – bondlike investments backed by bundled commercial mortgages – has all but dried up. Such securities accounted for about half of commercial real estate loans during the boom years of 2006 and 2007. If landlords can't refinance, it could lead to distress sales as they're forced to get rid of their buildings or face foreclosure – further driving down values of real estate assets – many of which are secured by mortgages held by banks.

While the market in commercial-mortgage-backed securities is stalled, banks and life insurance companies are still making commercial real estate loans. But they've tightened their standards significantly from the easy-credit days. Lenders are requiring more equity – essentially a larger down payment – and charging higher interest rates on loans. Where landlords may have been able to get a loan for 80 percent of a building's value during the boom, lenders now are limiting loan amounts to as little as 50 percent of value. "It's hard to find real estate financing anywhere in the world right now, with the exception of China," said Gayle Starr, senior vice president at AMB Property Corp. of San Francisco. "The vanilla deals are all that's getting done in this environment."

Meanwhile, the value of commercial property has fallen in many cases as the economy has deteriorated. Across all types of property, values dropped 17 percent in 2008, said Rebekah Brown, a vice president in asset management for JPMorgan in New York. Forecasts call for values to fall 15 percent further before stabilizing. David Blackford, chief executive of California Bank & Trust, said the bank isn't financing many new commercial real estate loans because there's no need for new buildings. "So we're focused on refinancing, and we're most focused on customers who have a lot of deposits with us," he said.Richard K. Davis, chief executive of Minneapolis-based U.S. Bancorp, said that a year ago the nationwide unemployment rate was 4.8 percent. Today, it's 7.6 percent and rising. If it goes up to 9.5 percent, almost everyone will know someone who has been laid off, he said. In such an environment, banks are reluctant to stretch too far when in making loans. Is the current economic downturn "at bottom, near bottom or just beginning?" Davis asked. "Who knows?"

U.S., U.K., and European regulators are in talks to jointly regulate the $28 trillion credit-default swap market, the Federal Reserve said today.Regulators including the Fed, U.K.’s Financial Services Authority, German Federal Financial Services Authority and European Central Bank met today to discuss a possible information sharing agreement, the Fed said in a statement on its Web site. The goal would be to apply consistent standards to the market and provide support across jurisdictions, the Fed said. Dealers are under pressure to process credit-default swaps trades through a clearinghouse in the U.S. or Europe after last year’s failure of Lehman Brothers Holdings Inc., which was among the largest traders of the contracts.

Earlier today, nine banks and brokers including Deutsche Bank AG, JPMorgan Chase & Co. and Barclays Plc committed to start using one or more clearinghouses within the 27-nation European region by the end of July. "Central clearing of CDS is particularly urgent to restore market confidence," European Union Financial Services Commissioner Charlie McCreevy said. "Given the size of derivatives markets I am looking whether other measures might be necessary to make sure they are adequately supervised and do not pose unnecessary risks to financial markets." Clearinghouses, capitalized by their members, add stability to markets by pooling the collateral of traders to share the risk of default. The practice also gives regulators access to prices and positions.

Other regulators in the international group include the U.S. Commodity Futures Trading Commission, the Securities and Exchange Commission, Deutsche Bundsbank and the New York State Banking Department. The group plans a meeting "in the near future" to discuss what is needed to share regulation activities over the market, according to the Fed. The group had an initial meeting on Jan. 12 in New York, the Fed said in the statement. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if the borrower defaults. Atlanta-based Intercontinental Exchange Inc., which has the support of nine dealers including Goldman Sachs Group Inc. and Morgan Stanley, said today that it will offer European-based clearing through its existing London clearinghouse.

"We’re working with all the appropriate European-based financial institutions to address their clearing needs," said Sunil Hirani, chief operating officer of Creditex Inc., which Intercontinental bought last year. He declined to identify which banks the company is working with. Intercontinental’s London operations, including the planned credit swap clearing, are regulated by the Financial Services Authority. Intercontinental is competing with Chicago-based CME Group Inc., Eurex AG and NYSE Euronext’s Liffe derivatives market to clear credit-default swaps. LCH.Clearnet Ltd., Europe’s largest securities clearinghouse, said last week it will start offering clearing through a Paris-based unit to meet European regulators’ demands.

In 2005 I interviewed Peter Wuffli, then the CEO of Swiss Bank UBS. I asked him how he felt about Swiss bank accounts being used by citizens of other countries to hide funds from the taxman. This is how he responded: "We have a very clear distinction between tax fraud, which is a criminal offense, and tax avoidance, which is not a criminal offense." For UBS and other Swiss banks this sort of thinking has justified allowing the wealthy and not-so-wealthy of the world to use Swiss financial institutions to hide money away from the prying eyes of tax men everywhere. Now, that lucrative practise, which has contributed richly to the cozy, lakeside splendor of Zurich and Geneva, the main Swiss banking centers, is very much under threat. Under a deferred prosecution agreement, UBS has ageed to provide the U.S. government with the identifies of and account information for, certain U.S. customers of UBS’s cross-border business "who appear to have committed tax fraud or the like".

UBS also has agreed to pay $780 million in disgorgement of profits from maintaining cross-border accounts, as well as unpaid taxes associated with fraudulent sham nominee and offshore structures. According to a statement from the U.S. Attorney of the Southern District of Florida in Miami, when UBS bought its Paine Webber brokerage in 2000, the bank voluntarily agreed to report to the Internal Revenue Service income for its U.S. clients. Instead, the document says, certain UBS executives helped clients set up new accounts in the names of nominees and/or sham entities. This device was used by UBS to justify evading its reporting obligations, the statement says.With a large U.S. brokerage and investment banking business, UBS was extraordinarily reckless. These actions, knowledge of which seemed to go quite high if not to the top of the bank, put all of these activities in danger. "It is apparent that as an organization we made mistakes and that our control systems were inadequate," CEO Marcel Rohner said in a statement.

While its not clear how many accounts will be subject to this agreement, American clients must be quaking in their boots. Some have already been pursuing settlements with the IRS. Tax-evading clients from other countries, notably Germany, and the Swiss private banking industry that thrives on their stashed wealth must also be very worried. If the U.S. can successfully pressure UBS into revealing sensitive information on clients, then other jurisdictions may also hope to be successful. UBS is trying to limit the number of accounts it will be forced to reveal. The U.S. government has filed a civil suit asking a court to order UBS to disclose all secret accounts of U.S. customers. According to the lawsuit, as many as 52,000 U.S. customers hid their UBS accounts from the government.

As much as $14.8 billion in assets may be involved. UBS says it will fight the suit. Peter Kurer, who took over as Chairman of UBS from Marcel Ospel last year commented: "Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of clients, who, with the active asistance of bank personnel, misused the confidentiality protections..." Maybe so, but it is difficult not to think that UBS and other Swiss banks are more and more going to be forced to earn their living from providing superior wealth management and other services, not just rely on the attractions of secrecy. UBS has said in the past that it is committed to doing just that, but some of the bank's executives obviously couldn't resist the easy money available from aiding tax evasion.

Shares in UBS hit record lows on Friday as Swiss bank stocks reeled on concern a widening U.S. tax probe will weaken strict privacy rules that underpin Switzerland's wealth management industry. UBS, the world's biggest banker to the rich, led the fall in Swiss bank shares. It was down 12.5 percent after hitting a fresh all-time low at 10.54 Swiss francs. Shares in rivals Credit Suisse and Julius Baer, both large players in the private banking industry which has thrived thanks to Swiss bank privacy laws, were down 9 and 10 percent respectively. Swiss banks were underperforming a fall in the DJ Stoxx index of European banks, which was down 5.4 percent.

Bank worries also hit the Swiss franc, down almost 1 percent against the dollar and 0.6 percent against the euro. Crisis-hit UBS late on Wednesday settled U.S. criminal charges that it had helped rich Americans to dodge taxes. But U.S. tax authorities said on Thursday they were still pursuing a civil lawsuit seeking to access details of 52,000 UBS clients. "It is very unfair to see that the whole profession has been dragged through the mud," Ivan Pictet, senior managing partner and scion of one of Switzerland's largest private banks, said in an interview with the Geneva daily Le Temps. "The reputation of the whole (Swiss) financial centre has been tarnished by the fault of a single banking institution," he said. "It is a very annoying precedent for Switzerland."

Despite tough Swiss laws protecting bank clients, the government said on Thursday it had no choice but to let UBS hand over data to avoid U.S. criminal charges which could have threatened the bank's existence and hurt the Swiss economy, heavily dependent on the banking industry. "The Swiss made a mistake, they believed that in caving in... that things would come to an end," Douglas Hornung, a Geneva lawyer who represents American clients of UBS who are under U.S. investigation, told Reuters. "They have now discovered with shock that it continues and the whole Swiss financial centre is in danger."

UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud. But U.S. tax authorities now want thousands more names of its citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts. Nearly a third of the wealth that is stashed in tax havens around the world is in Swiss banks -- an estimated $2.2 trillion -- making the Alpine state the world's biggest offshore center. Other havens include Liechtenstein, Bermuda and Singapore.

Tax-dodging schemes are increasingly under attack by governments scrambling to find revenue needed to finance the soaring costs of government stimulus programs. John Christensen, director of the Tax Justice Network which campaigns against bank secrecy, said he also saw a dramatic shift in public opinion against tax havens. "It is clear to many that the game is over, the game pretending this is a minor issue," he said. "Wealth management has become an euphemism for tax evasion." The issue will be on the agenda at a meeting of European leaders in Berlin at the weekend to prepare for the April G20 summit on reforming global financial rules.

The German government said on Friday it had taken note of the UBS settlement and said it will continue to push for the implementation of international standards on tax evasion. Germany, which paid an informant last year to obtain names of German clients hiding funds in LGT bank of Liechtenstein, is now investigating Prince Max of Liechtenstein for possible tax evasion, the Financial Times Deutschland reported on Friday. LGT said in a statement that Prince Max, the bank's CEO who lives in Munich and is the second son of current ruler Hans Adam II, had complied with Germany tax rules and was cooperating with authorities in the investigation. Switzerland's European Union neighbors are also watching the development of the UBS case and are hoping that cooperation with the U.S. authorities will set a precedent.

"I would expect that similar requests from EU member states would by no means be treated differently," said a spokeswoman for EU Tax Commissioner Laszlo Kovacs. Kenneth Farrugia, General Manager of Valetta Fund Services in Malta which caters for onshore and offshore clients, said the U.S. investigation had ramifications far beyond UBS. "UBS is not reliant on investors from the U.S., or even on private banking. The stability of UBS is not in question," he said. "The question is how will this affect U.S. customers of other Swiss banks?" UBS shares had rallied on Thursday on hopes the settlement would end uncertainties hanging over the company, which has written down more toxic assets than any other European bank during the credit crisis, prompting clients to loose confidence and withdraw billions of dollars.

Barack Obama calls them the Propeller-Heads, the cheerful band of financial nerds he has charged with saving America's economy. And on the Friday before Presidents' Day weekend, they were ready to show him the latest piece of their rescue plan: the 2010 federal budget. Having just squeezed through Congress what may be the largest spending bill in history, the President now needed to do something that would make the stimulus fight look easy: show the country and the world that he was as serious about preventing waste as he was about promoting growth. Only a lean federal budget would restore consumer confidence, keep congressional spending hawks in line and reassure wary foreigners so they would keep lending America the money it needs to climb out of this deep, dark hole.

When Obama walked into the Roosevelt Room in the West Wing, his economic wizards, led by Budget Director Peter Orszag and economy boss Larry Summers, were all wearing rainbow-colored baseball caps topped with goofy blue propellers. Obama laughed. He knew better than anyone else that it would take some mighty brainpower--and luck and political genius--to get this next stage right. Orszag had been working the problem for months, leading a four-hour meeting on his birthday, Dec. 16, in Chicago, at which Obama showed up with a vanilla cake.

Orszag, Summers, Treasury Secretary Timothy Geithner and Orszag's deputy Robert Nabors agreed that there was no avoiding a deficit this year of about $1.5 trillion, including the bank bailout and the stimulus bill. They were prepared to swim even deeper into the red next year, expanding Obama's initiatives on renewable energy and high-speed rail lines and raising the deficit to 10% of gross domestic product, the highest figure since World War II. But assuming the economy has begun to turn around, the two-year spending splurge would be followed by a steady return to fiscal sanity: Obama wanted to bring the deficit down to 3% of GDP--still a whopping $546 billion--by 2014.

So what is the magic formula? How does the White House buy time to spend now without spooking the markets or stoking fears that the U.S. intends to inflate its way out of debt? Obama's aides say they can do that by winding down the war in Iraq, cutting fat and raising taxes on the wealthiest Americans--and, later, by entitlement reform. All during the campaign, Obama talked about going through the budget "line by line," zeroing out programs that don't work or have outlived their usefulness. Even as he signed the stimulus bill, he had already pivoted to the next message. "We will need to do everything in the short term to get our economy moving again," he said, "while at the same time recognizing that we have inherited a trillion-dollar deficit, and we need to begin restoring fiscal discipline and taming our exploding deficits over the long term."

Yet everyone knows that while eliminating earmarks and cutting fat sounds good and plays well, it cannot alone address the deficit problem when discretionary spending amounts to less than 40% of the total budget. The only chance Obama will have to build confidence in the economy, even as he digs a deeper deficit hole in the next two years, is to convince Americans and the world that he's laying the foundation for long-term budget control through entitlement reform and, in particular, curbing the cost of health care. Total U.S. health-care spending in 2007 rose to $2.2 trillion, and the public portion is growing fast. "Medicare and Medicaid on their current trajectory cannot be sustained," Obama told a group of columnists aboard Air Force One. "And the only way I think we're going to fix it is if we see those two problems in the broader context of bending the curve down on health-care inflation." Obama's betting the future of the U.S. economy--and a lot of his own political capital--that this is even possible.

Sitting in an armchair in his enormous Eisenhower Building office overlooking the West Wing, Orszag unspools the argument he has made for years, first as a scholar at the Brookings Institution and then as head of the Congressional Budget Office. No long-term budget plan can get around the massive surge in costs that comes with rising medical-care prices and the aging of the baby boomers. "If health-care costs grow at the same rate over the next four decades as they did over the past four decades, you're up to 20% of gross domestic product by 2050," he claims. Translation: left unchecked, the government won't have money to spend on anything but health care.

Characteristically, the Propeller-Heads think they can tackle this problem in part through better data processing. First, a massive investment in health-information technology will track how America's health-care dollars are being spent. Next, a $1.1 billion government study, funded as part of the stimulus package, will take that information and figure out which treatments get the best outcomes for the least money. Which makes more sense for a clavicle fracture: a simple sling and waiting six weeks or surgical repair with a stainless-steel plate? The final step could be to create a federal health-care board that would shape Medicare- and Medicaid-reimbursement plans based on those studies.

Administration officials suggest that some savings would come from controlling drug costs and changing reimbursement procedures. One proposal would have Medicare Advantage providers compete for government contracts for the first time, a move projected to save $130 billion over 10 years. Another would be to stop paying for individual procedures and instead pay one lump sum for an entire treatment. Savings would not appear immediately, but over 20 years, they could total in the hundreds of billions of dollars. If the President tries to go down this road, the line of opponents will stretch well past the horizon. Even the idea of the "effectiveness" studies sparked a huge fight in Congress over the prospect of rationing health care in the U.S. It's easy to say better information will help doctors avoid expensive treatments that don't work.

But what about expensive treatments that do work? Who decides whether they count as being sufficiently cost-effective? Might the same treatment be approved for a 25-year-old but not for a 75-year-old, who won't live as long to benefit from it? What about treatments that work differently for men and women, or blacks and whites? Doctors warn that treatment decisions will be made by bureaucrats whose interest in saving money competes with their interest in saving lives. On Feb. 23, Obama will convene a fiscal-responsibility summit to talk about entitlement reform. He'll follow that the next night with his first address to a joint session of Congress, which his speechwriters are already building around the themes of health care and energy. Then Orszag will roll out the President's budget, and the fight will begin in earnest.

From his hard-edged Inaugural vow that "our time of standing pat, of protecting narrow interests and putting off unpleasant decisions--that time has surely passed," to his frequent promise of smarter government, Obama has reflected a national consensus that the old way of doing business is bankrupt. To have any chance of getting a stimulus bill that he could sign quickly, Obama had to let congressional Democrats take the lead. The result, he said, was not perfect, but "my bottom line is not how pretty the process was," he argued to columnists on Air Force One on Feb. 13. "My bottom line was 'Am I getting help to people who need it?'"

But this will be his budget, and the need to make hard choices starts with him. Will he actually identify popular programs he's willing to cut, or will he antagonize his party's patrons--such as drugmakers or trial lawyers--in the pursuit of real savings? Already party moderates worry that congressional liberals will reinsert programs Obama targets. Whatever he proposes, says Virginia Representative Jim Moran, "there is a fear that Congress could pork it back up again." If Obama pushes back, he has a chance to show that he really means change--even if some traditional supporters don't believe in it.

When Treasury Secretary Timothy Geithner unveiled his revamp of the U.S. bank-bailout fund, one of his central objectives was toughening oversight of how the money is used. Meeting that goal could be a challenge, though. The Congressional Oversight Panel, the body named by Congress to oversee the $700 billion bailout, consists of five strong-minded members who agree about the enormity of their task, and little else. The short-staffed panel is drawing heavily on the Harvard University law students and colleagues of its chairwoman, law professor Elizabeth Warren, as it churns out reports at a break-neck pace. Most of the staffers are 20-something aides from the Obama campaign, though an executive director and two banking lawyers were hired recently.

The panel's other members have had to hustle for a chance to weigh in, or, in the case of the body's two Republicans, to dissent altogether, something that isn't supposed to happen on a panel dubbed "bipartisan." "I think the jury is out over whether this panel is effective in fulfilling its congressional mandate," said Texas Republican Rep. Jeb Hensarling, who opposed last year's Troubled Asset Relief Program and is the only current member of Congress on the panel. At the helm is Ms. Warren, 59 years old, a consumer advocate who has spent her career battling big banks and credit-card companies. She is the author of eight books and numerous studies on bankruptcy. In public testimony, she has accused creditors of deliberately luring consumers into taking on unsupportable amounts of debt.

Many of Ms. Warren's views about debtor responsibility remain controversial, as does the reputation she earned as a sharp-elbowed ideological infighter when she was the top staffer on a congressional bankruptcy commission a decade ago. The oversight panel is supposed to assess the bailout fund's impact on financial markets, its transparency and whether it is helping to stem rising foreclosures. The panel has reported that the Treasury overpaid for shares in the nation's big banks, and that banks so far haven't used bailout money to prevent foreclosures. "The strength and power of the panel is we do bring unique and diverse backgrounds," said panel member Richard Neiman, as New York banking superintendent. "To the degree that we can reach consensus on principles or action steps, that would be very meaningful to Congress."

Time pressures and the crushing workload make that task more difficult, said panel member John E. Sununu, a Republican who served on finance and commerce committees during his term in the Senate. Harvard business-school professor David Moss, along with Ms. Warren, prepared the first draft of the panel's late-January recommendations on overhauling financial regulation. Messrs. Sununu and Neiman disagreed with some of Ms. Warren's regulatory proposals, and Mr. Neiman weighed in to edit some of them. Messrs. Sununu and Hensarling ended up issuing a dissenting report. Mr. Sununu said he, in contrast with Ms. Warren, "have dealt with the practical implications of regulation and have seen first-hand the moral hazard or unintended consequences they can create."

The first of the panel's monthly reports posed a series of questions to the Treasury; the second contained a grid that highlighted the Treasury's failure to respond to many of them. "There were some people who thought that grid was a surprise," Ms. Warren said with a grin during a recent interview. "That's an advantage to having lifetime tenure. If someone wants to fire me, I've got a great place to go back to." Ms. Warren made clear she sees her mission as much broader than mere oversight. "What we learn is the market, when left to its own devices, moves toward boom and bust," she said. That position has rankled Republicans on the panel, who say it isn't its job to rewrite the federal code. "It may veer into adjunct policy making with a leftist turn," said Mr. Hensarling. If it does, he added, "I assure you I will object."

Invoking his own name-and-shame policy, President Barack Obama warned the nation's mayors on Friday that he will "call them out" if they waste the money from his massive economic stimulus plan. "The American people are watching," Obama told a gathering of mayors at the White House. "They need this plan to work. They expect to see the money that they've earned _ they've worked so hard to earn _ spent in its intended purposes without waste, without inefficiency, without fraud." In the days since the White House and Congress came to terms on the $787 billion economic package, the political focus has shifted to how it will work.

Obama has staked his reputation not just on the promise of 3.5 million jobs saved or created, but also on a pledge to let the public see where the money goes. His budget chief this week released a 25,000-word document that details exactly how Cabinet and executive agencies, states and local organizations must report spending. It is a system meant to streamline reports so they can be displayed on the administration's new Web site, Recovery.gov. Using his presidential pulpit, Obama demanded accountability, from his friends in local government as well as his own agencies. He said the new legislation gives him tools to "watch the taxpayers' money with more rigor and transparency than ever," and that he will use them.

"If a federal agency proposes a project that will waste that money, I will not hesitate to call them out on it, and put a stop to it," he said. "I want everyone here to be on notice that if a local government does the same, I will call them out on it, and use the full power of my office and our administration to stop it." Miami Mayor Manny Diaz, who leads the U.S. Conference of Mayors, said he welcomed Obama's warning. "Absolutely. We get called out every day at the local level," Diaz said, drawing laughs from other mayors in a gathering with reporters on the White House driveway. "We have plenty of constituents who will be doing that before the president does."

Mayors of both parties said they appreciated the invitation to meet with Obama, Vice President Joe Biden and a handful of Cabinet secretaries. They cautioned, though, that the stimulus plan will only work if leaders at the state level direct the money to their cities in a clear, timely way. The economic plan will inject a sudden boost of cash into transportation, education, energy and health care. Beyond new spending, it aims to aid people through a package of tax cuts, extended unemployment benefits and short-term health insurance help. The cost will be added to a growing budget deficit.

Obama said government leaders have asked for the "unprecedented trust of the American people." "With that comes unprecedented obligations to spend that money wisely, free from politics and free from personal agendas," he said. The president did not specify how, exactly, he would call out one of his own agencies or a local government about wasteful projects.

Commercial banks and investment firms borrowed more over the past week from the Federal Reserve's emergency lending program. The Fed on Thursday reported that commercial banks averaged nearly $66 billion in daily borrowing over the week ending Wednesday. That was up from nearly $64.6 billion in average daily borrowing logged over the week that ended Feb. 11. Investment firms drew $26 billion over the past week from the Fed program. That was up slightly from an average of $25.8 billion the previous week. This category includes any loans that were made to the U.S.- and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Bank of America Corp.'s Merrill Lynch. The Fed's net holdings of "commercial paper" averaged $250.4 billion over the week ending Wednesday, a decrease of $5.8 billion from the previous week. It was the fourth straight week that such holdings declined, a positive development that suggests companies are relying less on the Fed for short-term financing needs, economists said.

The first-of-its-kind program started on Oct. 27, a time of intensified credit problems. At that time, the Fed began buying commercial paper — the crucial short-term debt that companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify. The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae were valued at $65.3 billion as of Wednesday, the same as last week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the $500 billion program late last year. Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, now in its second year.

Investment houses last March were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase. The identities of commercial banks and investment houses that borrow from the Fed program are not released. They now pay just 0.50 percent in interest for the emergency loans. Critics worry the Fed's actions have put billions of taxpayers' dollars at risk. The central bank's balance sheet now stands at $1.91 trillion, up from last week's $1.83 trillion, partly reflecting the pickup in Fannie and Freddie securities. The Fed's balance sheet has ballooned from just under $900 billion since September, when credit and financial stresses took a turn for the worse. That growth reflects the Fed's many unconventional efforts — various programs to lend or buy debt — to mend the financial system and jolt the economy out of recession. The report also said that credit provided to insurer American International Group from the Fed averaged $37.4 billion for the week ending Wednesday, down slightly from $37.7 billion averaged in the previous week.

Look out, New York. Washington is gaining on you. As the nation's most populous metro area feels Wall Street's pain, the fourth-largest -- Washington -- is barely sensing the recession. In fact, Moody's Economy.com estimates that metro Washington's economy will actually grow 2.5% from mid-2008 through mid-2010. New York's economy is expected to shrink 4.2%. It wouldn't be the first time that Washington benefited from a national crisis. Back in 1930 the District of Columbia was a quiet Southern town, scoffed at by New York sophisticates. But as the federal government ramped up to fight first the Great Depression and then World War II, its population grew 65% in two decades, vs. just 14% for New York City. This time Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.

"Oversight alone will (mean) tons of new jobs," enthuses Jill Landsman, a spokeswoman for the Northern Virginia Assn. of Realtors, who says the pace of home sales has picked up over the past year even as prices have continued to fall. Job-seeking Wall Streeters who jump on Amtrak's Acela to Washington may be dismayed to find that the maximum pay for an FDIC bank review examiner is close to $180,000. That's great for most folks, but paltry next to the bonus-swelled compensation many bankers are used to. The pay can be a lot better, though, at the Beltway Bandit consulting firms that are ramping up to assist the FDIC, Treasury Dept., and others. Consulting jobs for senior specialists in finance "can pay north of $200 an hour," says Andrew Reina, a practice director for risk consultant Ajilon Solutions.

Companies such as Computer Sciences Corp., Science Applications International Corp., or SAIC, and Booz Allen Hamilton employ tens of thousands of people in the Washington area and continue to expand. Even before the current crisis, professional and business services, which include private-sector lawyers, accountants, engineers, and consultants, made up 21% of metro Washington's annual economic output, even more than the 20% made up by government itself, according to a BusinessWeek estimate based on government data. The financial crisis "creates opportunities for companies like ours" to provide expert assistance, says David Booth, Computer Sciences Corp.'s president of global sales and marketing.

By at least one measure, it's Washington rather than New York that's attracting the best and brightest these days: According to George Mason University's Center for Regional Analysis, metro Washington leads the nation in the share of jobs that are in high-tech and the share of workers with advanced degrees. As for New York, the mix -- and the outlook -- is bleak. Finance typically accounts for 32% of the metro region's output, mostly because finance jobs pay so well. But pay limits, combined with job cuts, will harm everything from condos to car dealerships. New York State Labor Dept. analyst James Brown says, "There will still be a need for capital-raising, but it's pretty clear the sector won't be as profitable or as large." Adds Moody's Economy.com economist Marisa Di Natale: "New York, we think, is going to have a pretty severe recession."

In one measure of how dire things have gotten for New York's finance sector, Mayor Michael Bloomberg on Feb. 18 announced a $45 million plan to retrain investment bankers, traders, and others who have lost jobs on Wall Street. The money will also provide startup money and office space for new businesses by the former Wall Streeters. According to The New York Times, city officials expect New York to lose 65,000 jobs in finance during this recession, and not gain them back any time soon. "We say good luck to the people in New York. We know they're going through some tough times," says Arnold Punaro, general manager of SAIC's Washington operations. Then again, there is one resource that New York has in abundance, and that's self-confidence. Regional Plan Assn. President Robert Yaro, whose nonprofit organization coordinates planning in a 31-county area, says New York has been declared dead over and over since the 1880s, but always springs back. "The fundamental strength," says Yaro, "is that every 24-year-old in America and the world wants to be here. Because every other place seems kind of sleepy."

In a pre-dawn bargain, California legislators on Thursday passed a budget that closes a $42 billion hole, the worst state budget shortfall in U.S. history, after spending 45 straight hours locked in the Capitol trying to find a solution. The drama in Sacramento served as a warning to other states that their budget problems have the potential to turn into full-blown crises. While some of the issues are unique to California, nearly all states are feeling pressure from falling revenue and rising costs as tax collections decline and demand for services increases. At least 46 states are facing shortfalls this year or next, and the combined budget gaps are estimated to total more than $350 billion, according to the Center on Budget and Policy Priorities.

Lawmakers in California finally reached a deal after bowing to the demands of a moderate Senate Republican, whose price was a ballot measure allowing voters to opt to loosen the state's restrictive primary election laws. "These reforms were possible because we were in a crisis," Gov. Arnold Schwarzenegger (R) said afterward. "And as I've always said . . . crises also provide opportunities." Many state offices will still be shuttered Friday, in keeping with Schwarzenegger's decision to furlough all 238,000 state employees two days a month. The budget deal calls for $1.4 billion in savings from employee compensation, and negotiations are underway with unions that will help determine how to achieve the savings.

The deal includes tax increases that are designed to expire in two years, underscoring the temporary nature of the patch. But analysts warn that California faces the prospect of chronic revenue shortfalls, grounded in some ways in Proposition 13, the taxpayer revolt that 30 years ago put a cap on property taxes and made the state more reliant on income tax revenue, which rises and falls with the economy. "California's revenues are extra sensitive to the health of the economy," said Jed Kolko, associate director of research at the nonpartisan Public Policy Institute of California, in a December interview. "Most states are running a budget shortfall right now, but the degree of the crisis is so much greater in California."

Analysts also fault California lawmakers for writing a new budget each year rather than adopting a multiyear process that sets targets. With an economy larger than those of all but seven nations, California lumbered into the downturn carrying the nation's biggest revenue shortfall, in terms of dollars as well as percentages. Already hit harder than any other state's by the housing slide, the California treasury took a huge blow when the stock market dived, cutting by more than half its projections of revenue from the wedge of wealthy taxpayers who provide an outsize portion of revenue. Revenue from capital gains -- the 9 percent that California takes from the sale of a stock or property -- accounted for 11.5 percent of the state's general fund in the past fiscal year. That was estimated to drop to 5 percent in the current year and lower still the next.

Then-Gov. Gray Davis (D) faced a similar shortfall after the tech bubble burst in 2001, causing the torrent of tax revenue flowing out of Silicon Valley to drop precipitously. "I think a lot of people would say that California never really fully addressed the problem from 2001, which was that they had an upturn in revenues largely fueled by stock options and capital gains, and that evaporated fairly quickly," said Tracy Gordon, an assistant professor of public policy at the University of Maryland, who studied the California economy for seven years. Schwarzenegger swept into office more than five years ago after angry voters recalled Davis for his handling of the budget crisis, one less forbidding than the current shortfall. Analysts noted that among the $12 billion in taxes that Schwarzenegger negotiated with Democrats this week was a doubling of the very tax that more than anything hastened Davis's departure from office. The budget package, which Schwarzenegger promised to sign Friday, will double the state's infamous car tax to 1.15 percent.

It will also raise the state income tax by a point, to 8.25 percent, and impose a 2.5 percent surcharge on income tax bills. The $15 billion in spending cuts come mostly from education. The balance of the patch will come from borrowing and California's share of the federal stimulus. New York is in the next worst budget condition after California, with Gov. David A. Paterson (D) locked in negotiations with the Democratic-controlled legislature over how to plug a looming $13 billion deficit, which could total $48 billion over several years. Paterson has proposed painful cuts to health-care funding and education, but some members of the General Assembly favor a tax increase on the wealthy. Like the federal stimulus, the California package passed with only three GOP votes in the legislature's upper chamber. But the narrative gave Schwarzenegger a fresh opportunity to talk about bipartisanship, a favorite topic. Last year he championed the passage by voters of Proposition 11, which calls for legislative districts to be drawn by an expert panel, rather than lawmakers.

The budget deal could lead to the next step in election reform. In exchange for supporting it, GOP Sen. Abel Maldonado won a promise to let voters opt for "open primaries." Open primaries, if conducted as in Washington state, would replace party primaries with a single primary, with the top two vote-getters proceeding to the general election. Depending on how the rules are written, candidates might be able to choose whether to be identified by party; in Washington state, they can pick their own phrase. "We've got to bring people to the center," Schwarzenegger said after the deal was reached. "We have legislators that are so out to the right and so far out to the left, it's very hard to get them together."

Democratic lawmakers resisted the change, saying it was too dramatic to be considered in the eleventh hour of a budget crisis. But Bruce Cain, a political scientist at the University of California at Berkeley, said open primaries tend to help incumbents -- chiefly because, on a crowded or confusing ballot, name familiarity is paramount. Students of California government point to other structural issues that make the state less than a model, including the constitutional requirement of a two-thirds majority to pass a budget.

California may still seem to be the dreamy land of movie stars and swimming pools, beautiful beaches and endless summer. But the reality — and perhaps the future — of the nation's largest state looks more like this gritty city on San Pablo Bay north of San Francisco, where past extravagance has collided with economic recession and the collapse of home values to push it into bankruptcy. "We were first to the bankruptcy door, but there are numerous cities right behind us and watching," says Osby Davis, Vallejo's mayor. "I think it's just a matter of time before many (California) municipalities go to the bankruptcy court."

The troubles in Vallejo reflect what's happening up and down California, tarnishing the Golden State's image as a land of opportunity, innovation and good living. California often set standards for economic activity in good times; now it is setting them in bad times. The state itself stepped away from the brink of financial ruin early Thursday when the state Legislature ended months of deadlock and paralysis — which had shut down road projects and held up tax refund checks — by agreeing to a budget plan that increases taxes, cuts spending and borrows money to plug a $42 billion deficit by mid-2010.

In Vallejo, a city of 115,000 people, 1,700 homes are in foreclosure or owned by banks. The highest foreclosure rate in the USA — 9.5% last year — was in the California city of Stockton, which Forbes magazine declared as America's "most miserable city." Signs of decline abound, from potholed streets to public school classrooms that are among the nation's most crowded, to neighborhoods emptied of residents by the mortgage foreclosure crisis. Median home values in Southern California dropped 35% in the past year, and California has the lowest S&P bond rating of all 50 states. Gov. Arnold Schwarzenegger has proposed chopping the school year by five days, to give California one of the shortest school years in the nation.

California's troubles have been fueled by an influx of illegal immigrants who place increasing demands on social services. They have helped to boost the state's overall population even as it loses thousands of residents who are leaving for other states. In each of four years prior to June 2008, more people left California than moved in from other states, a reversal of a decades-long trend in which the state took in more than it lost. The U.S. Census reports that California's population rose despite the population outflow, from 34 million in 2000 to 37 million in 2008, because of an increase in births and foreign immigration, legal and illegal. Those leaving point to an unemployment rate that hit 9.3% in December, up from 5.9% a year earlier and fourth-highest in the nation, and taxes on income, sales and gas that are among the highest in the nation.

The exodus is enough that California could lose one of its 53 seats in the U.S. House of Representatives in the redistricting that will be based on the 2010 Census. "The main thing for me is the cost of living," says Carly Meyer, 25, who is weighing a move from Lompoc, a town of walnut farms and vineyards near the Pacific Coast, to Utah. "I've been thinking of buying a home, putting some money down, and it's just about impossible in California." California has all the problems associated with the credit crisis and recession — budget deficits, home foreclosures, layoffs, cutbacks — only bigger. It's not just because the state is the most populous, observers say.

Joel Kotkin, a Los Angeles author and fellow in urban futures at Chapman University in Orange, Calif., said Texas is also a large state with a significant population of illegal immigrants yet it has avoided the severe fiscal distress California is seeing. "Fundamentally, California is still the most attractive part of the United States by far in my mind: the weather, the topography, the concentration of diverse people and interesting things are still here," Kotkin says. But the recession exposed an ugly version of California Dreamin'. Politicians spent the money that flooded in during the real estate boom and thought little of what would happen when the property taxes and income taxes that fueled the spending during the boom vanished in the bust.

"There's no real reason for California to have the kind of decline it is having now," Kotkin laments. "It's more and more clear that it's the failure of the political system more than anything else." In Sacramento, the budget deal worked out early Thursday relies on $7.8 billion in aid from the federal stimulus package to help stop a fiscal meltdown in which state government was running out of cash to pay bills. It raises individual income and sales taxes by $12.5 billion while cutting almost $15 billion in state spending and relying on $5.4 billion in borrowing to see the state through the next budget year.

The deal ends the immediate threat of state layoffs and allows billions of dollars of construction projects, idled by the impasse, to resume. GOP lawmakers had balked at the tax increases proposed by the Republican governor and backed by majority Democrats in the Legislature. California's requirement that a two-thirds supermajority approve the budget — it is one of only three states that do so — gave veto power to the Republican minority. The logjam broke when Schwarzenegger won the vote of one GOP holdout in return for dropping a proposed 12-cents-a-gallon gas tax increase and other concessions. That Republican was one of three who voted for the budget.

California has long beenknown for being at the vanguardof American trends. The state's wide and vast freeways were a model for the nation. Its public university systems were envied for their affordability and quality. The nationwide environmental movement was born here with the Sierra Club. California's luring of lucrative aerospace and hightech industries had other statescoming up with tax-incentive programs to spawn their own SiliconValleys. Its entertainment industry, perfect weather and surfing culture drew millions. "Up through the mid-1960s, California was an expanding economy. We were building freeways, building new campuses for the university and state colleges, we were building new water projects," says Daniel J.B. Mitchell, professor-emeritus at UCLA's Anderson Graduate School of Management.

California started other trends, too. Its 1978 ballot initiative that capped property tax increases, or Proposition 13, sparked a nationwide revolt that forced similar restrictions on many states. California's response to the tax cap is why California finds itself in a deeper hole than other states, some say. For one thing, California makes it easy for interest groups to bypass elected representatives. City employees and advocates for spending in schools and other pet projects passed many propositions of their own over the years at the ballot box. Some, such as a 1988 proposition for minimum spending on education from kindergarten through two years of college, locked in spending levels in the state constitution.

Also, the raising of income taxes to make up for the limit on property taxes created a "volatile" situation, Mitchell says. The state soaked the rich with taxes on income and capital gains — a strategy that showered the state with money in good times but dried up when the stock market and real estate markets tanked, he says. Then there is the strain of illegal immigration. The Federation for American Immigration Reform estimates there are 3.2 million illegal immigrants in California. The cost of education, health care and other services for this population is $13 billion annually, and growing. For all the spending, Californians don't have a sense that things are improving. The public schools are "lousy," Mitchell says. "If your school district has to educate children in 70 or 80 languages, that gets expensive," says Dan Schnur, a Republican strategist and director of the Jesse Unruh Institute of Politics at the University of Southern California.

California's pupil-teacher ratio, 20.9-to-1, is far above the 15.5 U.S. average, third-worst in the nation behind Utah and Arizona, according to the National Center for Education Statistics. In achievement, California's student test scores rank below the nation's average in reading and math at fourth- and eighth-grade levels. Its teacher salaries rank highest in the nation, $64,424 this school year, according to the National Education Association. Even as voters fret about taxes and services, California seems determined to dig the deficit hole deeper. Last fall, voters approved a ballot initiative to spend $10 billion on a new high-speed rail system. Some wonder whether the state — the seventh largest economy in the world —has become ungovernable.

"We don't solve problems in California anymore, we pay off interestgroups," Kotkin says. "I am so disgusted." He and others say the tax and regulatory climate encourages businesses to flee. In Oregon, one of several Western states that woo California businesses, economic and community development director Tim McCabe says his state can offer cheaper land and electricity, labor costs lower than in California's big cities, lower taxes and significantly cheaper workers' compensation rates. California's 7.25% sales tax is the highest in the USA, as is its income tax rate of 10.3% for the top bracket. It led the nation in another innovation: the subprime mortgages at the heart of the housing crisis.

California was home to some of the biggest players in the industry, among them Irvine-based New Century Financial. Once the nation's biggest lender of subprime loans — those given to borrowers with less-than-stellar credit — New Century collapsed in 2007. That eliminated more than 20,000 jobs in Orange County, renowned for Newport Beach and wealthy residents. The vision of the quintessential California neighborhood, homes of white stucco graced with palm trees and Spanish tile, is giving way to a grimmer spectacle. Foreclosures have left neighborhoods filled with empty homes and abandoned swimming pools that are fetid breeding grounds for disease-carrying mosquitoes.

Some municipalities use helicopters to search for abandoned pools in need of chlorine treatment to prevent a public health danger, says George Huang, economist for San Bernardino County's economic development agency. "I found one cul-de-sac in Victorville where every house was foreclosed," Huang says. "You had gangs go in there, and there's nobody to call the police. There are some communities we look at and say this is not going to recover in two years. Nobody in their sane mind wants to be in that neighborhood." More than half the home sales in Southern California in December were foreclosures. More than 43,000 homes in San Bernardino County are in default, foreclosed or bank-owned.

Debbie Wise-Farwell blames the housing situation for sending her Orange County RV business into bankruptcy. Customers for big-ticket campers often tapped home equity to finance the purchases. "It wasn't (rising) gas prices that killed us," she says. "It was (falling) home prices." The drop in home prices, and thus property tax revenue, hit California harder, some say, because the state showed no restraint when times were better. In Vallejo, as in other cities in California, unions representing police, fire and other municipal workers won generous pay and benefit deals. A rookie Vallejo cop earns a base salary of $79,000 but in five years is earning $96,000, all before overtime, which Davis says totals $100,000 or more for some officers.

With bumps for longevity and additional training, a cop can earn $112,000 or more in base pay without being promoted to corporal, according to documents prepared for the City Council by its staff this month. Officers can make $160,000 or more. Mat Mustard, a detective and vice president of the local police union, says officers make 13% less than their original contracts called for, the city has lost one third of its cops to other cities that pay as well or better, and crime is going up. Mark Baldassare, president and CEO of Public Policy Institute of California, says the problem in the state. .. is the state itself. "While the nation is in a lot of difficulty in these areas, California has among the most difficult economic circumstances," he said."It's hard to have a high quality of life when you're under a lot of stress, and that's what people are feeling today. ...Government is not responding."

Global diversified miner Anglo American PLC Friday reported a 29% fall in net profit for 2008 and said it would cut 11% of its work force and suspend its share buyback and dividend in the face of a poor economic outlook marked by "unprecedented" uncertainty. The miner said it is reducing headcount by 19,000 workers, or 11% of its work force of 170,000. It also outlined cuts in capital spending and production. Anglo American Chief Executive Cynthia Carroll said the company was taking the steps to preserve cash so it could emerge from the downturn in a position to resume growth, though she acknowledged that the company had little visibility on when that might be. "It's a very uncertain time," Ms. Carroll said in a conference call with reporters.

Anglo American shares were down 12% in late morning trading in London, leading the mining sector in a broad selloff. The FTSE350 mining index was down 7.1%. The cost-cutting moves came as Anglo American said net profit declined to $5.22 billion in 2008 from $7.3 billion in 2007. The company's base metals division, which produces copper, nickel, zinc and lead, was the biggest drag on profit amid lower prices and sales, coupled with rising costs. Revenue was down 7.6% to $32.96 billion from $35.67 billion, in part reflecting the disposal of the company's Mondi packaging business and reduction of its stake in gold miner AngloGold Ashanti Ltd. in 2007. The mining sector has been hammered by a sudden and sharp downturn in commodity prices during the second half of last year. "2008 was a year of two very different halves," Ms. Carroll said.

Companies with heavy debt loads, in particular, have been forced to scramble to shore up their balance sheets. Anglo-Swiss miner Xstrata PLC is turning to the market with a $5.9 billion rights issue, and Anglo-Australian miner Rio Tinto is planning to raise $19.5 billion by selling convertible bonds and pieces of assets to Aluminum Corp. of China, known as Chinalco. Anglo American Finance Director Rene Medori said his company wouldn't need to take such measures. "I think the actions we have taken in terms of cash-flow preservation and the level of debt that we have -- we don't believe that we need to contemplate a rights issue," Mr. Medori said. Anglo American said in December that it would cut its 2009 capital spending by more than half, effectively pushing back some projects in the face of falling demand. The company capped capital expenditure for 2009 at $4.5 billion.

And Anglo effectively suspended its $4 billion share-buyback program in October. Through Oct. 2, buyback purchases totaled about $1.66 billion, or roughly 41% of the program that was announced in August 2007. The measures are meant to safeguard "balance sheet flexibility," the company said. But Anglo is still carrying about $11 billion in debt, leaving it unable to scoop up bargains in a beleaguered market. Ms. Carroll said the company would focus on developing existing projects, many of which are due to start production around 2011. "Our focus is internal. We have a lot of growth opportunities today and going into the future, and that's where our attentions are," Ms. Carroll said.

President Barack Obama, in his first foreign trip, sought to reassure Canada that he had no intention of turning some of his campaign rhetoric on trade into actual barriers between the U.S. and its largest trading partner. "Now is a time where we've got to be very careful about any signals of protectionism, because as the economy of the world contracts, I think there's going to be a strong impulse, on the part of constituencies in all countries, to see if they can engage in beggar-thy-neighbor policies," Mr. Obama said. Visiting Canada has traditionally been the first trip for a new U.S. president. In his daylong trip here, Mr. Obama touched upon an array of bilateral concerns, from trade to a declining North American auto industry to Afghanistan, where Canadian combat forces are set to leave by mid-2011.

He capped the visit with a joint appearance with Canadian Prime Minister Stephen Harper that highlighted some strains that have developed between the two sides in recent years. Mr. Harper took some apparent swipes at the Bush administration's position on climate change, noting that Washington was only now forming a comprehensive policy on the environment and energy. "I will be watching what's done in the United States with great interest," the Canadian leader said. "But I'm quite optimistic that we now have a partner on the North American continent that will provide leadership to the world on the climate-change issue." Mr. Harper also questioned whether the North American Free Trade Agreement could be reopened, as Mr. Obama had pledged to do during the campaign, without "unraveling what is a very complex agreement." Mr. Obama reiterated his belief that Nafta side agreements on environmental and labor standards should be incorporated into the main agreement to ensure enforcement.

"My hope is that as our advisers and staffs and economic teams work this through, that there's a way of doing this that is not disruptive to the extraordinarily important trade relationships that exist between the United States and Canada," Mr. Obama said. He repeatedly stressed his commitment to open trade between the U.S. and Canada. Canada's concerns over Mr. Obama's pledge to reopen Nafta have been exacerbated by a provision in the president's just-passed $787 billion economic-stimulus package that stipulates that certain building materials for infrastructure projects funded by the plan come from U.S. suppliers. The plan says the provision must be carried out in accordance with the U.S.'s obligations under the World Trade Organization, but questions remain over how the two mandates can be reconciled.

Mr. Obama had criticized Nafta on the campaign trail last year in hard-hit industrial states, where many people blame the trade deal for robbing the U.S. of manufacturing jobs. U.S.-Canada relations are likely to become a testing ground for Mr. Obama's efforts to balance the demands of his liberal and labor backers with the broader considerations and sensitivities he must consider as president. Before his departure, some labor and progressive groups sent a letter to Mr. Obama urging him to stand by his Nafta pledge. Environmentalists are pushing Mr. Obama to take a firm stand against Canada's already ailing oil-sands industry, which emits more greenhouse gases in the production of oil than are emitted in the production of ordinary crude. Mr. Obama brought along his energy czar, Carol Browner, who is expected to push hard for policies to address climate change.

The two leaders announced an agreement to begin a clean-energy dialogue. White House aides had said Mr. Obama would bring up his effort to advance research into technologies that capture carbon emissions and trap them underground, even from dirty fuel sources, such as Canadian oil sands and U.S. coal. The stimulus plan provides $3.5 billion for developing carbon capture and sequestration technology. Denis McDonough, Mr. Obama's deputy national security adviser, said the president would also press for the tougher greenhouse-gas reduction targets advocated by Mexican President Felipe Calderon. On Afghanistan -- where Mr. Obama has pledged to increase U.S. troop presence by about 50% -- the president didn't push Canada to rethink its plans to withdraw its troops. Instead, he said he praised Canada for its sacrifices and for making Afghanistan its largest recipient of foreign aid. Ottawa has said it won't renew its troop commitment to a conflict that has killed 108 Canadian soldiers.

Depression? That’s not even the half of it, according to billionaire George Soros. "The size of the problem is even larger than it was in the 1930s," writes Soros on the Huffington Post Web site. "Total credit outstanding was 160 percent of GDP in 1929, and it rose to 260 percent in 1932 due to the accumulation of debt and the decline of GDP." Comparatively, "We entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt."

Soros, however, has proposed a comprehensive policy package for President Obama to save the economy from collapsing into the depression, the problems of which he says are already upon us. The program has five major components, some of which have been enacted into law, and others which have been discussed in Congress and may soon also become law. These include a fiscal stimulus package; a thorough overhaul of the mortgage system; recapitalization of the banking system; an innovative energy policy; and reform of the international financial system

Despite Soros's pessimism, and his prediction that the next two quarters will show rapid deterioration in the economy, some economists are forecasting a second-half recovery. "Once we get clarity on the fiscal and financial packages those two things together could end up jump-starting the economy," says Joseph Carson with AllianceBernstein, quoted in the Wall Street Journal.

Ambrose Evans-Pritchard, international business editor for the Daily Telegraph in London, says debating the risk of a full-blown depression is pointless. "There’s no risk," Evans-Pritchard told Moneynews.com in a wide-ranging interview. "We’re in it. It’s begun." Evans-Pritchard has covered world politics and economics for 25 years. His reporting in the Telegraph about the global liquidity crisis and now banking crisis was way ahead of the curve. In an exclusive interview, Evans-Pritchard compared the present economic environment to the beginning of the Great Depression, just before the European banking crisis of 1931 that took down the German and central European banking systems. He pointed out that, during the past six months, the world’s major economies contracted at rates more severe than those of the 1930s.

During the last quarter, Japan’s economy contracted at a 12 percent annual rate, Germany’s at an 8 percent annual rate and some of the Eastern European economies fell by 30 percent. "I know that people in America see the damage all around them and think it couldn’t be worse, but it is actually worse in a lot of other countries, in part because they didn’t respond in time," Evans-Pritchard says. Stressing the need for a well-coordinated global stimulus, Evans-Pritchard observed that countries that tried to enact stimulus plans by themselves during the 1930s were severely punished in the currency markets. For this reason, he favors a worldwide, if temporary, fiscal plan.

"Everybody’s got to do it simultaneously," he says. "We’re in a once-in-a-century crisis, a classic Keynesian liquidity trap where the government needs to step in to some degree and replace the private economy temporarily with demand." Stimulus plans aside, Evans-Pritchard believes that, ultimately, the cure for this crisis must come through the monetary policy of central banks. The question here, he says, is whether zero interest rates, followed by quantitative easing in the major economies, is going to work. "An economy can cope with deflation, with falling prices, that’s not a problem in itself. It can cope with high levels of debt," Evans-Pritchard says. "What it cannot cope with is the two together. It’s the combination of these two things that’s the absolute killer, and this is what we face in the United States, Europe and Japan … basically globally at this point."

Additional key points from the interview:

Evans-Pritchard, long an opponent of the euro, believes now that the European currency will fall apart. "I think it’s an arrogant project pushed by political elite for political reasons," he says. "We’re now seeing the consequences, where a whole lot of the weaker countries are trapped in permanent deflation and depression" as countries like Spain and Ireland let their wage costs rise much too high in the years since the euro launched.

In contrast, Evans-Pritchard is convinced the dollar will remain the world’s default currency. "I know a lot of people think the dollar’s going to plunge, but I don’t really see what it’s going to plunge against," he says. "Ultimately, I think the dollar may get into difficulty three or four years down the road, but that’s a different story. As long as this crisis goes on, people want dollars," he says, noting that hedge funds and other big financial players have done most of their financial transactions in dollars. "As the global system implodes in on itself and there’s all this deleveraging going on, they all have to get dollars," he says. "Basically, the dollar is king and all the other currencies are revealing their weaknesses."

European response to the financial crisis was far too slow, Evans-Pritchard says, because European leaders didn’t take it seriously enough at first. "There was this complacency, particularly in Germany, where they thought, ‘Well, this is an Anglo-Saxon problem and an American problem and it’s nothing to do with us,’" he says. However, he says, France’s President Sarkozy did a good job of helping to rescue the European banking system after Lehman Brothers collapsed last year. "He’s made a lot of other mistakes, but he was very quick to recognize intuitively, before the others, how serious this crisis was going to be."

Evans-Pritchard now believes gold will continue to rise regardless of what happens to the banking system. He notes that massive buying of gold exchange-traded funds is already happening, as well as purchases of the pure metal and coins. The price has just surpassed $1,000. Banks in London, he says, report that their very rich clients are requesting delivery of the metal itself. "They don’t want a piece of paper, they want something they can keep hidden away in their homes," Evans-Pritchard says. "I think there are two outcomes to this crisis," he continues. "Either the central banks of the world succeed in reflating, in which case inflation’s going to take off and then gold will do very well — or they fail, in which case the institutional structure that we’ve know for the post-war era will start to unravel, in which case gold will also rocket." "I think it’s going to be one or the other, and both seem to me to be favorable to gold."

Economically strong euro zone countries have begun considering ways to shore up weaker member states for the first time in the decade-old history of the single currency bloc, Germany said on Friday. Speculation has been swirling all week that Germany and perhaps other big European countries could come to the aid of euro bloc countries like Ireland or Greece, which have seen their finances sharply deteriorate during the global crisis. On Friday, ahead of a weekend summit of European G20 countries in Berlin, German Foreign Minister and Vice Chancellor Frank-Walter Steinmeier confirmed such deliberations had begun, although he and other officials said no concrete plans existed.

"Especially an economy like the German one obviously relies on the economy of its neighbouring states and neighbouring markets not suffering too much," said Steinmeier, a Social Democrat who will challenge Chancellor Angela Merkel in a federal election in September. "That's why a process is now starting to consider to what extent support via ... the economically strong countries of the euro zone countries can happen. This is a process that has just started, and of which cannot yet be said to what extent measures can be taken," Steinmeier added. His comments came against the backdrop of a widening in euro zone bond yield spreads -- reflecting a divergence in the financial situation of nations in the currency bloc.

Many have issued vast amounts of debt to stimulate their economies and are now being forced to pay hefty premiums over stronger bloc members' debt to finance it. The cost of credit protection, or insuring against a sovereign default in the bloc, has soared. Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers, said he did not see an acute refinancing crisis in any of the euro zone countries. But were there such a crisis euro zone members should not be forced to ask for help from the International Monetary Fund. "I cannot accept that a euro country would not receive solidarity help within the system but would have to turn to an international monetary organisation," he said in Luxembourg. Juncker suggested Germany was coming around to his idea that euro zone countries could lend to each other.

The troubles of some euro zone members and rising concerns about the financial stability of some EU countries in eastern Europe could overshadow the Sunday summit hosted by Merkel. The meeting -- attended by the leaders of Britain, France, Italy, Spain, the Netherlands, Czech Republic and Luxembourg, as well as top European central bankers -- was called so that Europe could develop a common stance on overhauling global financial rules before a G20 summit in London on April 2. On Friday, senior German officials were at pains to play down the issue of euro zone woes and put the focus back on the summit which will look at 47 reform pledges made by G20 countries at their first meeting in Washington last November.

The officials said they expected agreement at the meeting on strengthening the roles of the IMF and Financial Stability Forum in overseeing financial reforms. Raising bank capital requirements during good economic times is also on the agenda. The Germans said they would push hard to ensure G20 countries follow through on a pledge that no markets, market players and instruments escape supervision in the future, although they cited differences with Britain on how strictly to regulate hedge funds. They also intend to send a strong signal of support for free trade. But economic tensions within the European Union are sure to play an important role on Sunday. German magazine Der Spiegel reported on Friday, without citing its sources, that the German finance ministry was studying the possibility of credit-worthy euro countries issuing a "bilateral bond" on behalf of another state in need.

It said a second option was for solvent countries together to issue a joint bond. Yet another step under consideration was an EU rescue package which could either be a stand-alone measure or organised with the IMF. The finance ministry denied in a statement that it was working on any such steps. Another possibility is the issuance of a bond guaranteed by the whole euro zone area. But Germany is strongly opposed and some other states are indifferent, euro zone sources said. Talk of help for weaker euro states was first raised by German Finance Minister Peer Steinbrueck in a speech on Monday in which he said all members of the euro bloc would have to help "if it came to a serious situation" with one member.

In the same speech he mentioned Ireland as being in a "very difficult situation". Other euro zone countries like Greece have also seen their bond spreads widen, reflecting worries about rising budget deficits. "All euro zone countries are still able to pay their bills. Nevertheless, a further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries," ING economist Carsten Brzeski said in a research note. "Right now, markets are especially looking at Greece and Ireland but future attention could also move towards Portugal, Spain and Italy."

The German Finance Ministry on Friday denied a report in weekly magazine Der Spiegel that it is weighing plans for a coordinated rescue of financially distressed euro-zone countries. "The Spiegel report doesn't correspond with the facts. The Federal Finance Ministry isn't working on any such concepts," said finance ministry spokeswoman Jeanette Schwamberger in Berlin, according to Dow Jones Newswires. The spokeswoman said Germany has "no doubt about the unity of the monetary union," but that rising bond yield spreads within the euro zone warrant "joint action by the European Commission, European Central Bank" and euro-zone finance ministers "to discuss measures with the affected member states to reverse this development."

Europe’s banking system faces growing risks that may require a region-wide effort to stabilize financial markets, said New York University economist Nouriel Roubini. "The banking problem in Europe is becoming more severe," Roubini said in a Bloomberg Television interview. "You have a series of countries that are really in trouble," Roubini said, citing Latvia, Estonia, Lithuania, Hungary, Belarus and Ukraine. European lenders are taking steps that could increase state control of banks as the recession deepens.

German Chancellor Angela Merkel’s cabinet approved draft legislation this week allowing for the takeover of Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. Roubini said European nations collectively may go further and assist member states that are unable to rescue their own banks. "Even the European Union now is thinking of helping those sovereigns and their banking systems," he said. Roubini, who predicted the global credit crisis, also discussed the need for stimulus plans. The best approach in the euro zone is "fiscal stimulus in the short term but fiscal consolidation over the medium term," he said.

He noted that while the $787 billion U.S. fiscal stimulus package, signed into law this week by President Barack Obama, is necessary, it may not be sufficient and will put the country deeper into debt. "We’re going to add $4 trillion to $5 trillion to the public debt over the next few years," he said. "Down the line, maybe two or four years, there may be a downgrade of even the United States." Still, he said, the U.S. is taking appropriate steps compared with other economies. He said the European Central Bank and Japan are "behind the curve."

The eurozone has lurched even deeper into recession after an unexpectedly sharp plunge in economic activity this month, a closely-watched survey has shown. A surprising large fall in eurozone purchasing managers’ indices has dashed hopes that the economic situation might have stabilised – and suggests growth figures for the first quarter of 2009 will be even worse than at the end of last year. France’s economy, which had previously held up relative to Germany, appeared particularly badly hit. The "composite" eurozone index, covering service and manufacturing sectors, fell from 38.3 in January to 36.2 in February, more than wiping out a small rise in last month’s survey and marking a fresh record low for the survey, which started in 1998.

Signs that the rate at which the economy was contracting had peaked have been "decisively wiped away," said Chris Williamson, chief economist at Markit, which products the survey. "There appears to be no sign of a bottoming out." The purchasing managers indices are closely watched because they are regarded as reliable, forward-looking indicators of economic activity. The eurozone economy has been shrinking since the middle of last year, but official figures last week showed the pace of contraction accelerated dramatically in the final quarter, when gross domestic product fell by 1.5 per cent. That put the region on course for the worst recession seen in continental Europe since the second world war.

The latest survey results strengthen further the case for further cuts in European Central Bank interest rates. Jean-Claude Trichet, ECB president, has signalled that a cut is likely at its meeting in early March. Financial markets expect a half percentage point cut to 1.5 per cent, but the continuingly deteriorating outlook could result in further cuts in coming months – especially with inflation pressures tumbling. Among the eurozone’s largest economies, Germany has been badly hit by collapsing demand for its exports. The German purchasing managers’ survey noted "particular weakness in demand from the US and Asia". But the country’s exporters are also highly exposed to eastern Europe – where economic difficulties have intensified significantly in recent days – suggesting that the worst may yet be to come. France, by contrast, has benefited from relatively robust domestic demand. But the French composite purchasing managers’ index tumbled from 40.4 in January to 37.3 this month, also a record low for the survey, with both manufacturing and service sectors faring badly. The effects of the downturn are still feeding through into the labour market. Eurozone employment fell for the eight consecutive month with the manufacturing sector seeing jobs lost at a faster rate than services, the surveys showed.

The euro zone economic downturn gathered pace in the early weeks of February, a closely watched survey revealed Friday, adding pressure on the European Central Bank to cut interest rates again in March. The survey showed that the services and manufacturing sectors in the 16 nations that share the single currency saw business activity fall at a record rate during the month. The preliminary estimate of the purchasing managers' index (PMI) -- a gauge of business activity -- fell to 38.9 in February from 42.2 in January for the services sector. That is the weakest since records began in 1998. The manufacturing PMI dropped to 33.6 from 34.4, the weakest since that survey started in 1997. The composite PMI, which combines the two, dropped to 36.2 from 38.3. A reading below 50 indicates a contraction and the bigger the difference from 50 the greater the contraction. "Overall, the very weak level of confidence reflects the ongoing recession, and suggests that GDP should contract further in the first quarter of 2009 in the main euro zone countries," said Frederik Ducrozet, economist at Calyon Credit Agricole.

In France, Europe's third-largest economy, business confidence sank in February to a new all-time low, according to a monthly reading by national statistics bureau INSEE. UniCredit economist Tullia Bucco called the drop "shocking" and said that the data points to a first quarter economic contraction "not very far" from the 1.2 percent drop France saw in the fourth quarter. In the final quarter of 2008, the then 15-nation euro zone -- Slovakia did not join until the start of 2009 -- contracted by 1.5 percent from the previous three-month period. The PMI figures will be updated in early March, ahead of the next rate-setting meeting of the European Central Bank. Most economists expect the central bank to start cutting rates again after deciding to keep the benchmark interest rate on hold at 2 percent in February.

Germany's Finance Ministry is currently looking into ways to help struggling euro zone member states. The ultimate goal is that of saving Europe's common currency from collapse. Will Germany have to bail out other EU states the way it is rescuing its banks and industry? The Germany finance minister chose a stage far away from the political hustle and bustle of the German capital Berlin to speak about the unspeakable. "We have a few countries in the euro zone who are getting into difficulties with their payments," Peer Steinbrück told a crowd in Düsseldorf on Monday. He was speaking at an event organized by his political party, the center-left Social Democrats (SPD), with the optimistic title: "The new decade." From Steinbrück's perspective, the coming decade may well be a gloomy one -- at least for some members of the euro zone, the countries that have adopted Europe's common currency. Ireland, especially, is currently in a "very difficult situation," Steinbrück said, confirming what until then only currency market speculators or independent researchers had dared to say. Then the minister went a whole lot further: "If one euro zone gets into trouble, then collectively we will have to be helpful."

The concession was tantamount to a complete reversal. Until Monday, not a single representative of the euro zone had been willing to discuss the possibility of aid measures for countries in dire financial straits. Instead they have pointed to the Maastricht Treaty, which provides the foundations for the common currency. The treaty prohibits the community of states from providing financial aid to individual euro zone members. Each government is required to keep its own finances in order so that no country becomes dependent on another. But now Steinmeier is creating the impression that some euro zone members may ultimately require the same kind of bailout already seen in the banking industry and manufacturing. It could come at the cost of billions to taxpayers. "The euro-region treaties don't foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty," Steinbrück said. For German taxpayers, this would be no small sum. If Germany were to pay into a bailout based on its size relative to other euro zone countries, it would be forced to cover one-fourth of the entire tab. Just one week ago, Steinbrück struck an altogether different tone. After a meeting with his fellow euro zone finance ministers, he warned of "horror scenarios." Jean-Claude Trichet, president of the European Central Bank (ECB) had just acknowledged reports of the growing problems a few governments are starting to have in obtaining fresh capital with the comment: "I think these rumors are unfounded."

The truth, though, is that the European Union, central bankers and governments have had concerns about the stability of the currency zone for some time now. Greece, Ireland and Italy, especially, are seen as wobbling. There's already speculation on the markets that these countries will soon be unable to pay their debts, and what used to be the realm of remote places like South America or Asia could soon play out right in the heart of Europe: the bankruptcy of entire countries. An unpublished European Commission report on the economic and financial situation of each of the member states sheds light on the desolate situation. According to the report, Italy's national debt will grow by 2010 to 110 percent of gross domestic product. Greece will reach a level close to 100 percent. Under the Maastricht Treaty, the upper ceiling is 60 percent. Germany, too, is set to exceed that limit in 2010, with the deficit growing to 72 percent of GDP. However, because of its economic strength, it is still considered on financial markets to be the most stabile country in the euro zone. The crash of Ireland's economic miracle has been the most dramatic. The country is on course to nearly triple its deficit. In 2007, it had a deficit equivalent to 25 percent of GDP. By 2010, it is expected to reach 68 percent. "Past experience of financial crises suggests that fiscal costs can be substantial," the European Commission experts warn in the report.

The consequences could be disastrous -- not only for individual countries, but also for the euro zone in its entirety. "As deficits and debt rise rapidly and financial sector rescue packages increase contingent liabilities, market concerns about sustainable fiscal development surface, reflected in sharply risen spreads on sovereign bonds," the study further states. These statements from EU Currency Commissioner Joaquin Almunia's experts may be written in economic jargon, but they are clearly understood by the financial markets, which are already responding. Compared to German government bonds, which are considered the most secure investments in the euro zone, the three countries are being forced to pay investors a significant risk premium. In Greece that premium is 3 percent, 2.5 percent in Ireland and 1.4 percent in Italy. Only a short time ago, the costs of floating bonds were largely unified across the euro zone. In light of interest rates that are drifting apart, media in some places, particularly in Britain and the United States, have begun speculating about the possible collapse of Europe's common currency. "Once a blessing, now a burden," the New York Times recently wrote in an article detailing the turbulence.

Jürgen Stark, the ECB's chief economist, believes these assessments are exaggerated. "When American states are on the verge of insolvency, no one questions the survival of the dollar," he says. States like California and New York are already forced to pay higher interest rates on bonds they issue than the federal government. Besides, the euro zone member states could hardly afford to allow the currency union to collapse -- especially the hardest-hit countries. If Greece or Italy reintroduced the drachma or the lira, "it would seriously aggravate these countries' economic and financial problems," Stark believes. The new currency would certainly be weaker than the euro, and the countries would still be required to pay their past debts in euros. The countries' debts and interest rates would create even further pressure. The ECB and European Commission are now moving to bring delinquent countries into line. Earlier this week, Currency Commissioner Almunia and ECB President Trichet took Greece to task. They called on the Greek finance minister to clean up his country's finances and introduce economic reforms.

In Germany, Finance Minister Steinbrück no longer believes that the heavily indebted countries are capable of pulling themselves out of the mess without outside help. He recently asked his staff to draft scenarios for rescue packages. They've come up with four. The payment problems could be solved by issuing "bilateral bonds." In this case, Germany would issue bonds to raise money for hard up countries. It would be a flexible solution, but it would also place the burden of bailing countries out on a few major EU states. As an alternative, a group of several member states could collectively float a bond. The disadvantage for Germany? Interest rates would be higher than if Berlin were to go it alone. The European treaties do not include provisions that would allow Brussels to undertake aid measures at the EU level. But the German Finance Ministry believes it would be legal for the EU to do so. According to the ministry's legal analysis, the EU could provide aid if a member state faced extraordinary circumstances. But the procedure would come with complications, since it would represent the first time the EU had taken out its own loans on capital markets. The final possibility cited by Steinbrück's staff would be an aid package provided by the International Monetary Fund, which already provides aid to countries in a financial state of emergency around the world. Of course, IMF can issue loans under far stricter conditions than would be possible for the EU or member states. The problem is that an intervention on that scale in Europe would not only be damaging for the country receiving the aid, but also for the entire euro zone.

Hardliners like ECB chief economist Stark don't want to hear anything about such proposals. "The ban preventing the EU and its member states from taking responsibility for the debts of partner countries is an important foundation for the currency union to function," he says. Stark fears that additional member states will abandon their fiscal discipline if they know others will bail them out. In his view, countries must take responsibility for cleaning up their own financial messes -- even if it results in the kinds of riots and unrest seen in Greece recently. For their part, academics are a bit more pragmatic. "The euro zone has to find a way of dealing with the financial disorder of individual countries," argues Henrik Enderlein, a professor at the Hertie School of Governance in Berlin. He believes the best option would be a rescue fund that would include IMF participation. That, he argues, would make it easier to ensure that improvements were made in the countries receiving them. The euro zone turbulence has shown that procedures so far in place to unify policies and provide checks and balances are insufficient for weathering a serious crisis. The most urgent omission is a provision between governments on the circumstances under which they would be obligated to bail each other out.

Nevertheless, on Wednesday German Finance Minister Steinbrück suggested that the euro zone would still be capable of acting -- even in a worst case scenario. He said it was totally absurd that anyone could believe the collapse of the euro zone was a possibility. Steinbrück's predecessor as finance minister, Hans Eichel, goes a step further, arguing: "We need a European economic government. The economic and finance policies of individual member states need to be coordinated better than they have been up until now." The nucleus of what could become that "economic government" already exists with the Euro Group, the body that includes the finance ministers of euro zone states. Its work could be enhanced if, from time to time, the countries' leaders would come together and address pressing economic and financial issues. During his time in office, Eichel tended to reject the calls for an economic government that were championed by the French. Just as Steinbrück is now doing.

The national debt is likely to be catapulted through the £2 trillion mark following the Treasury's decision to stand behind Britain's troubled banks' debts. In the latest Government figures, which underline fears about the impact of the crisis on the taxpayer and may spark further jitters over Britain's creditworthiness, the Office for National Statistics confirmed that it now considers both Lloyds Banking Group and Royal Bank of Scotland to be public sector companies. The ONS expects to have to add between £1 trillion and £1.5 trillion to the UK's public sector net debt, taking the total national debt to an unprecedented £2.2 trillion – just under 150pc of gross domestic product. This would be the worst debt total since the 1950s, when Britain was in the process of paying back its war debts. The figures were the latest in a blizzard of bad news on the public finances, which have been badly hit by the financial and economic crisis. The ONS confirmed its decision to add the debts of Lloyds and RBS to the public balance sheet, but warned that their complexity meant it was still working out exactly how much this would impact the national debt.

Although the sums involved are likely to frighten many taxpayers, the Government and independent analysts insist that the eventual cost to the taxpayer – even in the case of a further severe financial slide – would be only a fraction of this total. Goldman Sachs has estimated that the taxpayer may have to bear about £120bn of extra losses associated with supporting British banks. The ONS figures also included the impact of the nationalisation of Bradford & Bingley, which pushes up the public sector net debt by a further £50bn, meaning that it is already at the highest level since 1977. However, Simon Hayes, economist at Barclays Capital, added: "To the extent that no government is likely to stand by and watch a major bank collapse, it is somewhat arbitrary whether a bank's liabilities are included in the public finance statistics or not. "When push comes to shove, the public finances of all major economies are vulnerable to any further deterioration in banking sector prospects, whatever the official net debt figures might say." Although these figures will prove an embarrassment for the Chancellor, of more concern was the sharp drop in tax receipts in January – a month that is usually one of the best.

At £53.8bn, receipts were almost £7bn less than the same month last year. As a result, the Government paid back just £3.3bn of borrowing, compared with £13.9bn in the same month last year, the lowest January surplus since 1995. The surplus was also limited by a sharp increase in public investment. Government borrowing for the financial year to date now stands £67.2bn, compared with £23.1bn at the same time last year. The rise in borrowing is also partly explained by the rising level of unemployment in the UK, which forces the Government to spend more on benefits. Economists said the ONS figures made Alistair Darling's projections for £118bn of borrowing in 2009/10 look unrealistic, with some forecasting about £150bn. "Spending will rise sharply over the coming months as unemployment surges, while the deep contraction in activity will continue to reduce tax revenues," said Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club. "We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget. ITEM expects Public Sector Net Borrowing to rise above £130bn in 2009/10."

The number of UK homes repossessed last year rose 54pc to a 12-year high of 40,000, figures from the Council of Mortgage Lenders show. The steep rise in repossessions - equivalent to one in 290 mortgages - comes despite the Bank of England cutting interest rates from 5.5pc to 1pc over the past six months. The CML said the while the figure was less than forecast it still expects repossessions this year to reach about 75,000. Just under 220,000 borrowers had mortgage arrears of more than three months. By the end of 2008 around 182,600 mortgages or 1.57pc of the total had accumulated arrears equivalent to 2.5pc or more of the outstanding balance – a more accurate reflection of arrears rates than the number of months, according to the CML. This compares with 1.29pc at the end of the third quarter of 2008 and 1.08pc at the end of 2007.

The CML said: "The fact that there were fewer repossessions than expected, despite a worsening economy and rising unemployment, demonstrates that mortgage lenders are making strenuous efforts to ensure that repossession really is a last resort. "In the vast majority of cases where home owners are committed to working with their lender to keep their home, this outcome is successfully achieved." Michael Coogan, the CML's director general said: "Despite the upward pressure on mortgage arrears and repossessions arising from the problems in the economy and rising unemployment, both lenders and government are continuing to find more ways to help more people stay in their homes." He said there had been a sharp rise in cases where borrowers were handing back their keys or abandoning their properties. "We strongly urge borrowers to contact their lender and work with them before taking this step, as there may be other solutions," he added.

UK car production fell 58.7pc in January, confirming the dramatic decline in the country's motor industry. The steep decline comes as car makers including Ford, Honda, Toyota, Nissan, BMW's Mini and Jaguar Land Rover cut production and jobs. The data from the Society of Motor Manufacturers and Traders (SMMT) marks a further decline from December, when production fell by 47.5pc compared to a year earlier. Paul Everitt, the SMMT chief executive, said the rapid decline highlights the "critical" need for further Government measures to support the sector. Worldwide sales of new cars have plunged amid a lack of available finance and confidence among consumers. In response, auto companies have been forced into drastic restructurings and asking for state aid.

Lord Mandelson, the Business Secretary, has made £2.3bn of emergency loans available for car makers in the UK. But Mr Everitt believes incentive schemes to encourage motorists to replace their old cars are required, along with measures to boost car dealers' liquidity so they can afford to purchase vehicles. "The extent of the decline highlights the critical need for further government action to deliver the measures already announced and ease access to finance and credit," he said. "European markets have been lifted by scrappage incentive schemes and SMMT continues its call for a UK plan to boost the new vehicle market and support employment throughout the sector. The motor industry reiterates its request for an urgent government response."

The figures, which also show a 59.9pc fall in the production of commercial vehicles, cap a pitiful week for the industry. On Monday, 850 jobs were cut at BMW's Mini factory near Oxford, prompting employees to pelt management with fruit. The following day GKN, which makes car parts, axed 564 jobs "entirely due to the dramatic and sustained reduction in customer orders". In the US, General Motors and Chrysler have told the government they require $16.6bn (£11.7bn) of financial support. The car makers plan to axe 47,000 jobs worldwide – including 26,000 outside of Europe. GM Europe is also looking to offload Swedish auto-maker Saab and potentially sell stakes in the Opel and Vauxhall brands. The UK Government said it was "considering" GM's plans – which include a request for $6bn of support from governments outside the US.

Swedish car maker Saab Automobile AB Friday was granted protection from its creditors so that it can be reorganized and said it will seek to separate from its owner, General Motors Corp.. "We are now recreating Saab Automobile as an independent unit," Saab Chief Executive Jan-Ake Jonsson said in a statement after the Vanersborg District Court in southwestern Sweden approved its request to begin the reorganization process. "Today is the beginning of a new chapter in Saab's history." Sweden's government maintained its arms-length approach, saying it doesn't plan any support for Saab, though it didn't rule out the possibility of guaranteeing loans that Saab has sought from the European Investment Bank.

Saab said it hopes the court process over three months will transform it into a functioning company that is fully independent from its struggling Detroit- based owner. To accomplish this it will seek fresh funding from private and public sources, it said. The court appointed lawyer Guy Lofalk as administrator. Saab said the reorganization will be spearheaded by Lofalk, Jonsson, and Stephen Taylor, an international reorganization expert. Saab will present its reorganization plan to creditors within three weeks, it said. State secretary Joran Hagglund at the Swedish Ministry of Enterprise, Energy and Communication, told Dow Jones Newswires the government wasn't preparing any direct support for Saab. Hagglund said expectations shouldn't be high for the future of Saab, which has been generating losses consistently over the years. "In the competitive situation there is right now, one can't hope for big miracles," he said.

Saab last year sold fewer than 94,000 cars, down from about 125,000 vehicles in 2007. Its best-ever year was in 2006, when it sold 133,000 cars, making it a tiny player in the global auto industry. GM, as part of its effort to secure more loans from the U.S. government, had sought five billion Swedish kronor ($572 million) from the Swedish government. Sweden Wednesday rejected that request. GM bought a 50% stake in 1990 and acquired the rest in 2000. Saab in recent days has applied for a loan, believed to be about SEK5 billion, from the European Investment Bank. But Hagglund said Sweden would guarantee such a loan only if Saab first presents it with a firm business plan. "It's the same for (Saab) as for everybody else," he said. "There must be a reliable business plan. No guarantor would step in if they know (the borrower couldn't repay the money because of dire business prospects). We would look at the whole business situation."

He said Sweden, under existing law, may for a limited time pay Saab employees' salaries if the company runs out of cash. Hagglund said he didn't know if that could be the case "tomorrow or in a month." It remained uncertain Friday where, if at all, Saab may find the money it needs to survive as an independent company. Swedish investment fund Investor AB, a former shareholder in Saab Automobiles, declined to comment on whether it would be interested in taking a stake in Saab again. Jonsson said in a statement that Saab over the next 18 months is ready to launch three new models: the 9-5, 9-3X and 9-4X. He said that reorganization would help it "get these products to market while minimizing the liquidity impact of Saab on GM." Sweden in Decembers presented a SEK28 billion aid package for its auto sector. Most of it, SEK20 billion, consists of guarantees of EIB loans. Sweden's other car maker, Volvo Cars, a unit of Ford Motor Co., at the end of January applied to the EIB, backed by Sweden, for EUR475 million.

Asian markets ended sharply lower Friday, adding to their losses this week, with financial stocks weighed further down by weakness in their U.S. and European counterparts. In Tokyo trading, the Nikkei Stock Average of 225 companies ended down 1.9% at 7,416.38, after the Dow Jones Industrial Average overnight closed at its lowest in more than six years. The more inclusive Topix index ended 1.6% lower at 739.53, breaching its closing low of Oct. 27, 2008. The close is its lowest in a data stream dating back to 1985, according to Factset.

"Japanese gross domestic product data for last quarter was pretty bad. Globally, there also seems to be a contraction of risk exposure again, may be related to be European situation," said Yoji Takeda, head of regional equities at RBC Investment. Japanese exporters also declined during the session, as investors took little comfort from the yen's recent weakness. Mr. Takeda said the yen's depreciation against the U.S. dollar was "too small to help the exporters." Shares of Sony Corp. lost 1.6%, while Nintendo Co. shed 3.7%. Elsewhere in the region, Australia's S&P/ASX 200 ended down 1.4%, China's Shanghai Composite Index rebounded from early losses to end up 1.5%, Taiwan's Taiex slid 2% and Hong Kong's Hang Seng Index finished down 2.5%. India's Sensitive Index dipped 2.2%, while Singapore's Straits Times Index gave up 2.1%.

South Korea's Kospi Composite slumped 3.7% and New Zealand's NZX-50 fell 1.5%, with both taking losses into a fifth straight session. A slumping Korean won hurt shares in Seoul with the market briefly touching its lowest level in nearly 11 weeks. "Foreigners are unloading stocks at a fast pace and they seem to be alarmed by the fast deterioration" in the won, said Park Suk-hyun at Eugene Investment & Securities. The U.S. dollar broke over the 1,500-won mark early Friday, to touch its highest level since Nov. 26. Regional markets performed even worse during the week, with the South Korean index registering a double-digit percentage decline. "With all the bad news circling the global economic environment, participants aren't willing to hold positions over the weekend, so we've seem some good old Friday profit taking," said IG Markets research analyst Ben Potter.

The declines for Asian indexes came after a sell-off in financial names pushed the Dow Jones Industrial Average to its lowest point of the credit crisis and in roughly six years. U.S. stock futures were recently pointing toward a lower opening again, with Dow Jones Industrial Average futures down 67 points. "Expectations for the various measures [unveiled by the U.S. government to shore up the economy and financial markets] seem to have turned to distrust," said Hong In-young at HMC Investment Securities in Korea. Financial stocks across Asia were weak with Westpac down 3.7% in Sydney and Shinhan Financial down 5.2% in Seoul. Mizuho Financial Group fell 4.1% in Tokyo, HSBC Holdings skidded 2.3% in Hong Kong, Cathay Financial Holding dropped 2.3% in Taipei and ICICI Bank sank 7.1% in Mumbai.

Australia's Macquarie Group ended down 5.7%, with Macquarie's subsidiaries and the overall market coming under pressure as investors analyzed corporate results released this week. Qantas slumped 4.3% after Moody's Investor Service cut the company's long term senior unsecured rating to Baa2 from Baa1, citing a deterioration in the airline's credit profile. On mainland China, electronics and petrochemical companies advanced after the government Thursday authorized further sector-specific stimulus plans, with TCL up 5.7% and Shenzhen Noposion Agrochemicals adding 6.5% in Shenzhen trading. Shares of Bridgestone Corp. fell 7.4% in Tokyo after the tire maker released a cautious 2009 outlook Thursday. New Zealand shares were still being dragged down by concerns about leverage at individual companies and weakness in corporate earnings. Fisher & Paykel Appliances fell 4.8% and PGG Wrightson plunged 28.1%. Sky Network Television fell 5.7% after saying its first half net profit fell 16.7% from a year earlier, to NZ$42.6 million. Malaysian and Philippine shares fell 1%. The euro was lower against the U.S. dollar and yen, at $1.2592 from $1.2663 late in New York, and at ¥118.05, from ¥119.51.

Against the Japanese currency, the dollar changed hands for ¥93.78 compared with ¥94.39 in New York, although it was higher than the ¥91.97 it traded at a week ago. BNZ strategist Danica Hampton expected the euro to lose more ground against the dollar soon. "I like the idea of selling the euro into rallies -- I'm still concerned about the euro-zone economy and its relationship with the Eastern European economies." February gold futures were down $4.50 to $971.60 a troy ounce, after slipping $1.60 overnight in New York, but some analysts were still looking for a push in the near term to $1,000, given hefty flows into exchange-traded funds. March Nymex crude oil futures were down 95 cents at $38.53 a barrel on Globex before the contract's expiry Friday, pulled down by falling U.S. stocks and data showing a record number of Americans are drawing government unemployment benefits. Negative indicators "put a huge dark cloud over the [oil] market," said Tony Rosado, a broker with GA Global Markets. Earlier in New York, crude jumped 14% to a 10-day high after the Department of Energy reported the first draw on U.S. oil inventories since December.

rgentine farmers, beset by falling commodity prices and drought, said they will halt sales of grains and some beef cattle for four days to protest President Cristina Kirchner's agrarian policy. The announcement came minutes after the government agreed to a meeting with farm leaders next Tuesday. Farmers are calling on Mrs. Kirchner to reduce a 35% export tax on soybeans, offer greater drought assistance and ease controls on marketing corn, wheat and beef. In the kickoff to the strike, farmers from across the country will gather Friday in the central town of Leones for what's being billed as a major show of force. Last year, farmers rocked the nation with protests for four months and dealt Mrs. Kirchner a bitter defeat, blocking a proposed increase in the soybean tax. The government has designated Minister of Production Debora Giorgi to meet with farm leaders Tuesday, the day the farmers say they will lift the strike. Argentina's agrarian sector is the anchor of its economy, accounting for more than 40% of exports.

Another bout of protests from farmers is a headache Mrs. Kirchner doesn't need, with the economy slumping and mid-term elections slated for October. Mrs. Kirchner said Thursday that she sought "dialogue without threats or pressures." Nevertheless, Mrs. Kirchner, and her husband, Nestor, "have never shown an interest in sitting down with farmers and developing long-term policies for agriculture," says political scientist Carlos Germano. Farmers' biggest complaint is the export tax on soybeans, which generated around 10% of the government's tax revenue in 2008. They say the levy threatens them with economic ruin. Wednesday, Mrs. Kirchner seemed to throw cold water on farmers' demands. "Some think that they contribute more than others," she said. "If that's so, it's because they earn more." Many economists say Mrs. Kirchner would be hard-pressed to grant farmers concessions. Argentina will be stretched to make about $18 billion in debt payments due this year, while also launching an economic stimulus plan.

Bernard Madoff, who sent his clients thousands of receipts purporting to document their trades, has left no trace of buying any securities for customers for as much as 13 years, the trustee liquidating his securities firm said. “We have found no evidence to indicate that securities were purchased for customers’ accounts” for “perhaps as much as 13 years,” said Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC. It was “cash in and cash out,” he said. Picard also said he found no separation between the company’s broker-dealer division and its investment advisory unit, which prosecutors have said was at the center of an alleged $50 billion Ponzi scheme at Madoff’s New York-based firm.

“We have found nothing to suggest there was any difference, any separateness,” Picard said at a meeting today with Madoff clients in U.S. Bankruptcy Court in Manhattan. “It was all one.” Madoff’s securities firm went into liquidation on Dec. 15, four days after Madoff was arrested for allegedly running the scheme. Picard was appointed by the Securities Investor Protection Corp., the government-sponsored group that oversees broker liquidations. He is responsible for finding assets of the brokerage and recovering them for customers. As part of his effort, he has subpoenaed at least a dozen financial institutions, including the Chicago Board of Trade, CME Clearing House and a unit of Jeffries Group Inc. Picard said Feb. 4 he has recovered about $946.4 million in cash and securities for Madoff customers.

The trustee told customers today that he wants to sell the firm’s market-making unit in “a matter of weeks.” “That appears to have some value,” he said, adding that he has retained 45 employees to sell the unit. “We’re in the process of getting some bids.” Picard sat at a desk before a crowd of hundreds of people in a packed auditorium at the federal courthouse, located near the southern tip of Manhattan. Customers waited 25 minutes to get past a single-file security line where they removed their belts and coats and went through a metal detector. Creditors may file claims until July 2, though they are advised to submit forms by March 4 to be paid out of “customer property,” Picard’s Web site said. Today, he said that the July deadline is the more important one because it appears there are no securities to distribute.

Madoff, 70, has been charged by federal prosecutors with one count of securities fraud. He faces as much as 20 years in prison and a $5 million fine if convicted. He hasn’t formally responded to the charges. “We are operating out of a crime scene,” Picard said at the meeting. He added that his office has received 2,350 customer claims as of noon yesterday. “Anybody who thinks he, she or it has a claim against BLMIS is urged to file that claim,” Picard said. “What we urge you to do is file a claim. We cannot make a determination in a vacuum. Picard told the assembled investors that his office has located Madoff firm books and records at its Manhattan offices, the basement of its Third Avenue building, at a warehouse and at a “backup site.” “At the warehouse, we recently inventoried approximately 7,000 boxes and that’s in addition to the file cabinets worth of materials we found at the premises and that we’ve been able to review under the watchful eye of the FBI,” Picard said. “We’re getting a feel for how this operation worked.”

Picard said he reduced overhead for the Madoff firm by about $300,000 a week. When he came in, it had about 175 or 180 employees, he told the clients. Now he has only 60, including 45 at the market-making operation, which he said are necessary. Customer claims will be capped at $500,000 for securities under the Securities Investor Protection Act, the trustee said. David J. Sheehan, a partner at Picard’s law firm, Baker Hostetler in New York, spoke to the audience about what he called the “dreaded clawbacks.” He said the trustee would seek to recover money that investors withdrew over the amount they put in. “We will be seeking to recover false profits from people who received them in substantial amounts over the years,” Sheehan said. “You have to think of it this way: It’s your money.” Picard said he would not pay out a SIPC claim if he has a potential clawback claim against the investor. “These clawbacks are making criminals out of innocent people,” a woman from the audience said.

Some audience members thanked Picard, others vented their frustration on him. “Where is our recourse?” one woman asked. “Where is our help here?” “We’re the victims not only of Madoff,” one man told Picard. “We’re the victims of the SEC.” Picard emphasized that his administrative expenses, including his salary, come from the SIPC fund, not the money and assets he recovers. “I would hope in the recovery you look not just for artwork but I would get the furniture, his clothes, the curtains on the windows,” one woman said. Picard explained that Madoff’s personal effects are handled by prosecutors in the criminal case. Once they may become available, “I assure you, we are not going to waste any time,” he said.

The trustee said he won’t offer advice on tax issues concerning Madoff investments. Tax treatment is up to Congress and the U.S. Internal Revenue Service, he said. One investor at the meeting, Ron Weinstein, 61, said in an interview that he lost a “ton of money” and is in the process of selling his Manhattan apartment. He said he knew Madoff. He was “unassuming, a very nice guy,” Weinstein said. “I feel like that I was a very poor judge of character.” Weinstein said he has “moved past what I would call the mourning period, and the acceptance of what is, and life goes on. I go forward.”

People scrambled on Wednesday to get back their money from firms linked to Texas billionaire Allen Stanford, as fallout from U.S. fraud charges against him spread from the United States and the Caribbean to Latin America and Europe. The U.S. Securities and Exchange Commission, which charged Mr. Stanford and two Stanford Group Co executives on Tuesday with an $8 billion fraud, said it did not know where the flamboyant 58-year-old financier and sports entrepreneur was. In Miami, the local NBC television station reported that Stanford Group offices there had been raided by federal authorities, a day after a similar raid at Stanford’s U.S. headquarters in Houston. The U.S. Attorney’s Office and an FBI spokeswoman in Miami said their agencies had not been involved in the latest raid and referred calls to the SEC.

Stanford’s operations in Miami and Baton Rouge, Louisiana, were being shut down by a court-appointed receiver, a source briefed on the matter said. ABC News, citing federal authorities, reported the Federal Bureau of Investigation and others have been investigating whether Mr. Stanford was involved in laundering drug money for Mexico Gulf cartel. Citing unnamed officials, ABC reported Mexican authorities had detained one of Mr. Stanford’s private planes as part of the investigation, which has been going on since last year. Officials said checks found inside the plane were believed to be connected to the Gulf cartel, one of Mexico’s most violent gangs, ABC reported. ABC cited authorities as saying Mr.Stanford could potentially face criminal charges of money laundering and bribery of foreign officials. Authorities said the SEC’s action against Stanford on Tuesday may have complicated the federal drug investigation.

From the tiny Caribbean island of Antigua, a key outpost in Stanford’s business empire, to Andean nations Venezuela, Colombia and Ecuador, investors and depositors, most angry, some in tears, besieged his banks and companies to try to redeem funds or seek information about their savings. After the shock generated by the alleged $50 billion Ponzi scheme fraud blamed on Wall Street veteran Bernard Madoff, regulators sought to calm public fears about another major financial scandal at a time of global recession and banking failures. In Colombia, a local affiliate of Stanford halted its activities on that country’s stock exchange. In Ecuador, the local Stanford affiliate was suspended for 30 days from operating in the Quito stock exchange, the bourse said.

While mystery surrounded Mr. Stanford’s whereabouts, CNBC television reported that he tried to hire a private jet to fly from Houston to Antigua, but the jet lessor refused to accept his credit card. The SEC accused Stanford in a civil complaint of fraudulently selling high-yield certificates of deposit from his Antiguan affiliate, Stanford International Bank (SIB). Asked by reporters whether there would be more fraud cases of the scale and scope of Madoff and Stanford, U.S. Attorney General Eric Holder told reporters: "It’s hard to say. I’d like to think that those are going to be the largest." He declined to comment on why the Justice Department has not filed criminal charges against Stanford.

Asked if Mr. Stanford may be outside the United States, SEC spokeswoman Kimberly Garber said: "Certainly that’s a possibility, but we don’t know." In the twin-island Caribbean state of Antigua and Barbuda, where Stanford is the biggest private employer, Prime Minister Baldwin Spencer said the SEC charges could have "catastrophic" consequences, but urged the public not to panic. In Antigua’s capital, St. John’s, and in Venezuela’s, Caracas, hundreds besieged Stanford banks and offices. "I heard the news and came straight down. We’ve had money here for two years and I want it back," said Caracas resident Josefina Moreno, who added her son had about $10,000 invested.

A Venezuelan official estimated that people in that country have invested about $2.5 billion in SIB. Antiguan police officers stood watch at Stanford-controlled Bank of Antigua where hundreds turned out on Wednesday. "I’d like to get my money out," said Andrea Lamar, 28. Bank of Antigua, with three branches in Antigua and Barbuda, is part of Stanford’s global business interests, but separate from SIB, the offshore affiliate at the heart of fraud charges lodged by U.S. regulators. In Mexico City, some 40 mainly middle-aged and elderly people waited outside a Stanford office for information. Tempers frayed. "I demand to be let in," one woman shouted. Peruvian regulators sent an inspection team to local Stanford offices.

In its civil complaint, the SEC said SIB sold $8 billion in CDs by promising returns "that exceed those available through true certificates of deposits offered by traditional banks." Stanford Group claims to oversee $50 billion in assets. In Houston, the first of what lawyers think may be a flood of lawsuits against Stanford was filed in federal court on Tuesday, hours after a U.S. judge froze the company’s assets. Four investors who each put in between $250,000 and $600,000 with Stanford will seek "consequential damages" in a trial where they will lay out how the company’s army of financial advisers managed to sell $6.7 billion in CDs. In Florida, Michael A. Gross, acting director of the division of securities at the Florida Office of Financial Regulation, said the office still had "an open examination" of Mr. Stanford’s business in the state, conducted through a trust office in Miami and broker-dealers in Miami, Longboat Key, Boca Raton and Vero Beach.

Fifteen months ago, in November 2007, the Financial Industry Regulatory Authority (FINRA) fined Stanford Group Co $10,000 for distributing marketing materials that "failed to present fair and balanced treatment of the risks and potential benefits of a CD investment." In the 2007 claim, FINRA said that Stanford failed to tell clients that it had a potential conflict of interest because an affiliated bank was issuing the CDs. Stanford did not admit any wrongdoing. FINRA regulates close to 5,000 brokerages. The SEC said Mr. Stanford had failed to respond to subpoenas seeking testimony. Since Tuesday, Stanford company officials have been referring requests for comment to the SEC. There were no signs of imminent criminal charges against Mr. Stanford, whose personal fortune was estimated by Forbes Magazine last year at $2.2 billion.

A federal judge appointed a receiver on Tuesday "to take possession and control of defendants’ assets for the protection of defendants’ victims." Mr. Stanford, who holds dual U.S.-Antiguan citizenship, has donated millions of dollars to U.S. politicians and secured endorsements from sports stars, including golfer Vijay Singh and soccer player Michael Owen. Mr. Singh, wearing a golf shirt with a Stanford logo, told Reuters in California that he was "just surprised by it all." He said Allen Stanford had donated large sums to charity. Other public figures tried to distance themselves from Stanford. British brokerage and investment house Blue Oak Capital said it had canceled a deal to distribute research from Stanford Washington Research Group.

Former Swiss President Adolf Ogi said he would resign from the board of Stanford Financial Group. A leading figure in British cricket described the England and Wales Cricket Board’s (ECB) association with Stanford as a "fiasco. A planned Stanford-sponsored Twenty20 international cricket tournament was now unlikely to take place, ECB chairman Giles Clarke said. In Antigua, Mr. Stanford owns the country’s largest newspaper, heads a local commercial bank, and is the first American to receive a knighthood from its government. He has homes across the region, from Antigua to St. Croix in the U.S. Virgin Islands to Miami.

Westfield Group, the world's biggest shopping-center owner by market value, will cut operating hours at most of its 55 U.S. malls to help retailers trim expenses as the recession deepens. Most of the malls will open 30 minutes later and close 30 minutes earlier Monday through Friday, and close an hour earlier on Sundays at about half the locations, said Katy Dickey, a spokeswoman for Sydney-based Westfield. Hours will generally stay the same on Saturdays with the changes to take effect from March 1, Dickey said yesterday by telephone. Declining home values and the worst unemployment in 16 years have caused consumers to cut spending, which helped reduce shopper traffic 12.9 percent in January, according to data from industry researcher ShopperTrak. The International Council of Shopping Centers and Goldman Sachs Group Inc. predict retail sales in February will decline by as much as 2 percent.

"This initiative is intended to help our retailers save, conserve resources and respond to changing consumer traffic patterns," Dickey said. U.S. gross domestic product will shrink at a 5 percent annual rate in the first three months of this year, with a 1.7 percent contraction from April through June, according to a Bloomberg News survey of economists earlier this month. Several of Westfield's shopping-center owner's locations won't cut their hours. These include Garden State Plaza in New Jersey, San Francisco Centre, and Horton Plaza in San Diego. Westfield consulted with retailers on the changes and received positive feedback, Dickey said. Department-store hours won't be affected, she added. Westfield won't comment on whether it will lower rents at the affected malls, Dickey said.

"I hope this is a harbinger of measures being implemented by landlords to partner with the retailers to achieve cost savings," Nina Kampler, an executive vice president at Hilco Real Estate, said yesterday in an interview. Westfield shares rose 1.2 percent to close at A$10.10 in Sydney after Deutsche Bank AG and Credit Suisse Group AG gave the stock their highest ratings. "As negative sales numbers continue to arise from the U.S., we believe Westfield occupancies will be under pressure over the course of 2009," Andrew Rosivach, a Credit Suisse analyst in Sydney, said in a report. Rosivach raised his rating to "outperform" from 'neutral" citing the "long-term" value of its mall assets.

Simon Property Group Inc., the largest U.S. shopping-mall owner, also has reduced operating hours at some of its locations. Indianapolis-based Simon this week announced that starting March 2, its three malls in Pittsburgh -- Century III Mall, Ross Park Mall and South Hills Village -- will be open from 10 a.m. to 9 p.m. from Monday through Saturday. They had been open until 9:30 p.m. The malls' Sunday hours of 11 a.m. to 6 p.m. weren't changed. "In Pittsburgh, my understanding is that some of the anchors were closing at 9," Simon spokesman Les Morris said in an interview. Anchor stores are larger retailers, often department stores, that help draw customers to a mall. When anchor stores close earlier, it can reduce traffic to other stores, he said. Closing earlier "was something our retailers -- some of them -- wanted to do."

In early January, Simon cut the operating hours at 14 shopping malls in Massachusetts, three in New Hampshire, and one in Connecticut. Those malls are now open from 10 a.m. to 9 p.m. Monday through Saturday, instead of closing at 9:30 p.m., and from 12 to 6 p.m. on Sunday, instead of opening at 11 a.m., Morris said. Westfield operates 119 shopping centers in Australia, New Zealand, the U.K. and the U.S. and works with about 23,000 retailers, according to the property group's Web site. Simon has stakes in 386 properties in North America, Europe and Asia.

Desperate for a job and willing to take almost anything with a paycheck? Take a number. Between the increase in overall job seekers and the reduction in the number of jobs available, competition for even the least desirable jobs has become much steeper. Traffic to job search site Indeed.com is up 26% in the last quarter and jumped 98% from last year, according to the company. "People are so thirsty for anything that resembles a job out there," said Dave Sanford, executive vice president of client services for Winter, Wyman, a staffing firm based in Waltham, Mass, "that candidates are applying to every opening that is even remotely possible." Those doing the hiring are having a tougher time weeding through all the resumes to find qualified applicants.

For example, when IT Manager Mark Callahan was looking to fill an entry level position at his company, he received over 100 resumes overnight - 90% of which were unqualified for the job. "It was a lot of work weeding through resumes," said Callahan, who was hoping to hire a desktop support technician at his company, NTWebs. "Probably eight or 10 were qualified and of that I brought in five people to interview," Callahan said. But, "what really surprised me," he said, "was that the kinds of resumes I was receiving was for the most part, way off." Emily Smith, 31, could have been one of those applicants. She is really an administrator by trade, but out of work and desperate, Smith says she has applied to hundreds of positions across various industries, including a housekeeping supervisor, nursing assistant, gas station attendant and "so many babysitting jobs it's not funny," she said.

Still no bites. "I have asked several potential employers how many resumes they have received and the answers range from 200 to over 3,000," she said. "How do I stand out in a list of over three thousand people when the job market is impersonal and the field is flooded with applicants?" she asked. Smith still believes she'll have better luck outside her area of expertise. "As an admin or secretary you have to have someone move or die to get a job." Many job candidates are submitting resumes to openings that they aren't perfectly qualified for, Sanford of Winter, Wyman said, which is a big problem for those on the receiving end of the application process. "Hiring mangers have to literally shovel through thousands of responses," he said.

"As a recruiter we're faced with a humongous amount of applications," said Pete Ronza, a compensation & benefits manager at the University of St. Thomas in St. Paul, Minn. "We could write the ad in Russian and it wouldn't matter." Ronza says that many applications don't have a chance because they don't fit with the job requirements. "We sympathize, but we have to find the best person," he said. Paul Forster, co-founder and CEO of Indeed.com recommends that job seekers focus their search on only those jobs they are a fit for: "don't apply for jobs you're overqualified for or under qualified for," he said. "Companies notice candidates with the skills and experience they're looking for. If you don't have these, your resume will be ignored."

He also says that in today's competitive market, cover letters must be customized to the company or individual recipient. "Try to show how your qualifications and experience relate to the company's needs." In addition, spend time on the company's Web site and read up on company news, Forster suggests. If possible, find out who is interviewing and learn about them. If you know anyone who works at a company you are applying to, ask them for advice. Candidates have to find ways to differentiate themselves, rather than just blanketing the job market with resumes. "Don't resort to the shot gun approach," Forster said.

Where's the trendiest place to shop these days? Try your closet. To wit: Kelly Thorsen, a school secretary from Lakeland, Florida, needed a nice pair of boots for the holiday season. A new pair would have cost some $200, but a splurge was not an option for the mother of two. "Last year, I might have gone out and started looking around," says Thorsen, 46. "Now, we are being a lot more careful with where our dollars are being spent. To go out and purchase a new pair of boots was not in my realm." So she literally dusted off a decade-old pair of ragged black leather boots sitting in her closet, and visited a shoe repair shop for the first time in her life. For a fashion-conscious woman, the thought of recycling 10-year old boots with worn out heels did hurt her pride a bit. "I walked in with my tail between my legs," she says. "It was something, initially, I was not proud of." Then she saw the price: $16. And the work: the boots looked good as new. "I walked out of there going, 'okay, all right," Thorsen says. She proudly wore her healed heels to all her holiday parties.

As consumers cut back on big-ticket purchases this year, many fix-it folks are busier than ever. Why go out and spend money on new shoes, suits, or SUVs when it's so much cheaper to repair the ones you already have? Around the country cobblers, tailors, car mechanics and bike, vacuum, watch, and television repairmen are all reporting strong revenues during the recession. Jim McFarland, a third generation shoe repairman who owns McFarland's Shoe Repair in Lakeland, has fought many anxiety bouts his 23 years running the shop. "I've spent nights pacing my floor at two, three in the morning, wondering 'how am I going to get through this?'" says McFarland, who teethed on leather as a baby. "Now, I sleep the whole night through," he says. "I've never seen it like this — it's wonderful."

McFarland says his year-over-year revenues rose 28% in December, and 35% in January. "I'd love to see a 50% jump in February," he says. As the historian for the Shoe Service Institute of America, the cobbler trade group, McFarland also tracks local media stories on shoe repair performance, and talks to hundreds of shop owners throughout the country. He says that cobblers are reporting increases in the range of 25-40% during the fourth quarter of 2008 and the first few months of '09.In the past, one of the biggest challenges tradesmen faced was a psychological barrier that kept consumers out of the repair shop. I will not stoop so low as to squeeze more life out of these rusty shoes, or that old dress. That feeling still exists: an Indianapolis publishing executive named Pat, who just took four suit jackets in for restoration, asked that her last name not be printed because "it's nobody's business that I'm recycling clothing." But the economic realities eventually prevail. Pat was looking to extend her wardrobe when she chose between new and used. "Should I buy, or look in the closet and see what I can do with the clothes that are already there?" she says. She picked the closet, and is pleased with the results.

For tailors who also make custom clothing in their shops, the alteration game is a savior. Joyce Hittesdorf, the president of the Association of Sewing and Design Professionals who also runs her own small business in Carmel, Indiana, has picked up about eight new clients over the past month. "They were all looking to salvage what they had," she says. "Alterations were the secondary part of our business, now it's more primary." At Imparali Custom Tailors in New York City, new custom suit sales fell about 20% in 2008, while revenues from fix-up jobs jumped 30%. Matt Harpalani, the shop's manager, notes that many of his customers who have lost weight now opt for an alteration, rather than a new Armani. "The alteration business has paid our rent," Harpalani says.

The repair trade is even delivering positive numbers to the wrecked automobile industry. Since they can't afford a new car right now, customers are holding onto their old ones longer. During December, for example, the average trade-in-time for cars was 6.3 years, compared with 5.7 years in 2007. These rides often need repairs to stay alive. "Overall, our members are saying they are seeing a revenue increase," says Angie Wilson, VP of marketing and communications for the Automotive Service Association, which represents 8,000 independent car repair shops around the country. According to an association survey, 60% of auto-repair shops said they saw an increase in '08 year-over-year sales. The average jump was 16%. (This survey was taken in August, before the financial meltdown. Auto industry economists say repair growth slowed down in the fourth quarter, as customers deferred big-ticket maintenance jobs during the worst months of the downturn, and that pent-up demand will lift the numbers in '09.)

Further, even though car dealerships are near ghost towns these days, on-site service sales rose 2% during the last four months. Paul Taylor, chief economist of the National Automobile Dealers Association, is projecting growth "significantly above 3%" this year. "It's welcome news," Taylor says of the repair rise. "It's important that when consumer expenditures are dead in the water, this sector of the economy is growing." While the recession has helped all types of repair professions, the cobblers seem to be enjoying their luck more than most. Shoe repair is a dying industry. During the Great Depression, there were some 130,000 shops across the country. Now, there are only 7,000. Graying, middle-aged repairmen are the young turks — there's a clear shortage of twenty- and thirtysomething cobblers in today's shops. "We have a chance to reintroduce our industry," says Randy Lipsom, who runs four shoe repair shops in St. Louis. The shoes are falling off the shelves in Lipsom's shops: he now has to stuff the overflow work into bins. A year ago, those same shelves were half-empty. "I'm getting more customers under 35 than I've ever seen," says Lipsom. "They're spreading the word among people their age, about the quality and savings shops like ours can offer, and it's helping." McFarland, the Florida shoe repairman, thinks a two-year downturn would give the industry "a shot in the arm" that could last 10-15 years. But even McFarland is quick to temper his excitement. He too realizes that what's good for the cobbler might be bad for the souls of his countrymen. "The more people we get," he says, "the worse it is out there."

Hard economic times are acting like instant fertilizer on an industry that had been growing slowly: home vegetable gardening. Amid the Washington talk of "shovel-ready" recession projects, it appears few projects are more shovel-ready than backyard gardens. Veggie seed sales are up double-digits at the nation's biggest seed sellers this year. What's more, the number of homes growing vegetables will jump more than 40% this year compared with just two years ago, projects the National Gardening Association, a non-profit organization for gardening education. "As the economy goes down, food gardening goes up," says Bruce Butterfield, the group's research director. "We haven't seen this kind of spike in 30 years."

At W. Atlee Burpee, the world's largest seed company, seed sales will jump 25% this year, Chairman George Ball estimates. "It's weird to have everyone else you talk to experiencing plunging markets. We're on a roll." Burpee is taking pains to craft its marketing to fit the times, says Ball. It recently rolled out the "Money Garden," a value bundle of tomato, bean, red pepper, carrot, lettuce and snap pea seeds sold online at www.burpee.com. With a separate retail value of $20, the pack sells for $10, and under the right conditions, Burpee claims, can produce $650 worth of veggies. "Seeds are God's microchip," says Ball. But in the suddenly hot world of veggie seed sales, Burpee has company:

Park Seed. Vegetable seed sales are up 20% this year vs. 2008, says Walter Yates, who oversees the company's e-commerce. Says Yates, "Every time this country goes through a recession, there is a surge of folks who want to get back to basics."

Renee's Garden. Business manager Sarah Renfro says veggie seed sales were up about 10% last year and look to grow up to 20%. "After years of declining veggie seed sales, the whole cycle has completely reversed," says Renee Shepherd, president.

Harris Seeds. Home garden vegetable seed sales are up 80% from one year ago, says Dick Chamberlin, president. "A jump like this has never happened."

Ferry-Morse Seed. After 2008 sales grew 5%, the company stocked up on 50% more vegetable seeds to sell in 2009, says John Hamrick, vice president of sales and marketing.

The veggies are apparently squeezing flowers for space in the nation's gardens. Ferry-Morse, along with others, is seeing a decline in sales of flower seeds, and Hamrick says the company has switched its inventory mix from 50-50 to 40% flower seeds and 60% veggies.

It's Friday of another bad market week and the financials got hammered this week. That means it's time to play "Name That Bank!" where you, the taxpayer, get to guess the name of the next bank that Timmy and Barry will shutdown in your name!

Stoneleigh, I had the same problem. I went into my layout tab for my blog, hit save, and everything was ok again. I suspect that Google changed something and hitting save applied the change to my current layout thus enabling it to be visible. But that's purely a guess.

Speculation at Daily Kos that Citi &/or BoA may be going down this weekend.

Continuing from yesterday’s comments:

Ilargi, thanks for your thoughtful reply about my buying my friends’ house on short sale.

Yes, I can afford to do so. I’m extremely well situated on a farm where we grow our own food, heat with wood, and are prepared for powerdown. We will still have money left.

I”m planning to sell the house back to my friends at 4% which would lower their monthly payment to well under $1,000. Their jobs are in eldercare, in a large city, so there will be work. The house is not near me, but we are very good friends. I want my friends safely in their own home when the economy collapses. I’d feel awful if I did nothing and they lost the house, which will definitely happen if I don’t help. Rents there are higher than their pre-balloon payment. Without good credit it’s nigh impossible to rent. The foreclosure would be the coup de grace for this family.

Can you suggest a % offer? Charles Hugh Smith at www.oftwominds.com/blog.html wrote on Feb 18th that he thinks housing prices will drop back to their 1998 price.

I hear you. I was a landlord myself, once, almost 40 years ago, and had a similar (though not 1/4 the damage) disappointing outcome Those tenants were strangers. After they moved out the next tenants improved the house, and begged me to sell it to them for several years. I had had hopes of moving into the house myself some day, but I eventually sold it, so that worked out.

As I wrote above, I’m not renting, but rather selling back on very fair terms, with a payment that should be affordable. They had no problem keeping up with a higher payment. It was the outrageous outright fraud of forcing them into arrears by late-paying their taxes, then tacking on late fees, and then the balloon that did them in.

There’s a selfish motive here too. I’m almost elderly myself, and I can’t imagine wanting to be taken care of by anyone other than my friends, so this can be thought of as my prepaid eldercare insurance policy.

Stoneleigh:

Thanks for your input (addressed to Paleocon).

My friends are ‘nesters’. They are homebodies who take care of their home. They don’t want to move.

The reason I asked for a suggested offer is so that I can pay closer to what the house will really be worth in a few years, in order to help my friends in the long run. These people have had their equity stripped from them and I want to be the one who forces the bank to give it back. I’ve read of people buying foreclosures for as little as $5,000. So I figure it’d be worth it to the bank to sell short to save itself money it would lose on a foreclosure.

Older Wiser Bunny: “Please take a moment to get out your notes from yesterday afternoon’s lecture. We will be reviewing the highlights of our esteemed Professor Roubunny’s lecture: “Surviving the turmoil in the burrows”, we will then break up into groups and...”

El Gallinazo: Unfortunately, all the homes at our current price range... are lathe and plaster. Occasionally multiple layers of the crud.

Submit your advice: Thanks for the huge reassurances, my wife is a teacher at a private school that has no insurance (religious based private school: Pray you don't get sick), so she works a second job so we have health insurance.

We currently rent. I would love to stay where I am another year or more and hopefully be able to buy what I really want, or at least not be forced into buying what we would most likely lose, and would have to pay on for darn near forever.

pineapple: Thanks for the advice on committing to buying, and thats a great idea, show her what we COULD have, and why I want the nicer house.

Stoneleigh, Ilargi: As always, thanks for being here, and for all of the research and the articles. I guess everyone who knows me considers me a doomer, but I'm fairly sure they don't have a clue whats coming, and refuse to even look at it. I think that mindset is really the majority way of thinking right now.

I think you nailed it on the head when you pointed out how much little change there really is in this administration. Heck, Volker was supposed to be the key economist for Obama, what happened? Did he lock himself in a basement somewhere with a couple years worth of food and water, or did someone else lock him in a basement somewhere so the market can stay optimistic of an april recovery.

I always let you go without my comments, much as I appreciate you. But this site would be dead if it were seeing the world the way you do.

"If they nationalize C and BAC, the US dollar is finished as a currency, as there would be runs on the banks come Monday morning which no temporary bank holiday would stop."

Well, that's what they're trying to prevent, right? 30+% losses in stock value per day ain't joking material. Some form of nationalization is inevitable, though they may try to find a more palatable term.

But nationalization is the worst thing on the planet if you don't know what you're buying. And Obama has not a single clue.

I'm starting to think Argentina. Your deposits are "guaranteed", but you can take out only $100 a week. As in Bank Holiday Lite.

Now, mind you, this may happen only 6 or 12 months from now, but it's hard to see how it would not.

Still, as I wrote today, the biggest banks are literally bigger than the government, which means the whole shebang could start in the morning. There's no way we can tell. Not the details.

Starcade: Explain how nationalization of large banks would cause a run?

Nothing would change except a preferred stake in the bank, and guarantee of liabilities, similiar to what happened in Europe a few months back. The government is not stupid enough to let it affect day to day operations for the customers.

But what we both have to know is: Whatever has to be done will not be done.

I actually was beginning to start to pay off my credit cards with more fervor right around the time of the first real dislocation of all this back in the summer of 2007.

I stopped, realizing where this had to end.

We are all but already $25 trillion in admitted debt.

$10.7T national debt$5-6T Fannie/Freddie$8T or so in the bailouts.

I have heard numerous inklings in the last two days that Citibank and/or Bank of America don't see Monday without nationalization.

Understand what that would mean, given the precise statement you make about the banks being bigger than the government (so much so that they now control it): You'd have an uncontrollable bank run, and you'd have to declare Martial Law almost in concurrence with the declaration of bank limitations as you propose.

I mean, you know what the US consumers (who already basically can't really put an acceptable value on anything financial-wise at this point) will do when it's clear that two of the three remaining bedrock banks (the third being WFC) effectively go under.

Combine that with the end of at least GM (if not Chrysler too), and the whole shooting match implodes rather quickly.

It seems like there's some serious backpeddling on the Nationalization idea. Obama's Press Secretary stated it wasn't going to happen. BofA and Wells Fargo's CEO's said they are in just dandy shape. It also seems to have fallen off of the MSM radar for the moment.

If Obama Nationalizes the Banks now, he would be taking a serious credibility hit. I'm quite surprised that the White House made such a strong statement, because we all know that he's going to be looking a bit silly when he has to do a U-turn.

I”m planning to sell the house back to my friends at 4% which would lower their monthly payment to well under $1,000. Their jobs are in eldercare, in a large city, so there will be work. The house is not near me, but we are very good friends. I want my friends safely in their own home when the economy collapses. I’d feel awful if I did nothing and they lost the house, which will definitely happen if I don’t help. Rents there are higher than their pre-balloon payment. Without good credit it’s nigh impossible to rent. The foreclosure would be the coup de grace for this family.

Can you suggest a % offer? Charles Hugh Smith at www.oftwominds.com/blog.html wrote on Feb 18th that he thinks housing prices will drop back to their 1998 price.

It sounds like you have thought this through and have come up with an arrangement with close friends that has a chance of working. The house price still has a very long way to fall, but I doubt if you'll get the bank to go for a realistic figure. Banks aren't exactly being brutally honest with themselves or others about what things are likely to be worth. That means you'd have to overpay compared to what it will actually be worth in a few years time if you want to go ahead. It may be worth doing that if they are very good friends who would be able to return the favour by looking after you in later years.

The financial stress on your friends probably won't go away though. As things get more difficult, even a lower mortgage payment may be too much for them. That means this may not be a final solution for them, but an interim step that could cost you more down the line. If you can afford to take the loss and you are effectively gaining something valuable in terms of social capital then go ahead, but carefully. I'd offer the bank as little as possible. If you make them a low offer you can always bargain until you reach a figure that both sides can live with.

ilargi said:Now, mind you, this may happen only 6 or 12 months from now, but it's hard to see how it would not.

Still, as I wrote today, the biggest banks are literally bigger than the government, which means the whole shebang could start in the morning. There's no way we can tell. Not the details.

Oh I hope it can wait until I get my tax refund and new rabbits! but if it happens tomorrow I am better prepared than I would be if I had never found this site!

Thank you for the insightful intro as usual ilargi, I am here everyday!@stoneleigh: your precise, brief reasoning the other day for why FDIC deposits are not as safe as short-term t-bills was enough to convince a friend to take action, thank you! You have a way with words that resonate when mine do not!rachel

Learn what comparable houses are selling for right now (CP). Assume that the house will sell for at 20% of peak market price in 3 years(FP). Calculate what paying the mortgage will total for three years(M).

If (CP-FB)-M>0

Then it may be worth while to help your friends pay the mortgaged until housing gets close to troughing. Banks are stupid (obviously). The fact that they would save money by avoiding foreclosure doesn't mean that they would give you a good price. When the time is right, pull the pin. When the bank forecloses, your friends can put their stuff in self storage and take a Virgin Island holiday. Then make sure you buy the foreclosed house from the bank. It's not like all my vulture friends are going to be lining up to buy it.

The collapse in the US is relatively small potatoes in comparison to the wave of collapse washing in from Eastern Europe. With the Russian tailwind this one is the real tsunami.

We can wax poetic about how bad it is in the US. It's becoming a tautology. We know it's bad. I would wager that the incoming tsunami is not from Lehman (which if it were big enough to take ten years would have already overwhelmed the system) nor the US zombies. They can soldier on through a variety of bailouts and manipulations for quite awhile 'til. Take Dodd's horizon as the limit he and his colleagues see of just how long the US can hang on by its fingernails.

The Westen Europeans have stepped in it to a degree which would make even Dodd's stodgy sphincter pucker. They've loaned trillions to Eastern Europe's home and business owners *and* they did it in their own currencies. Loans must be repaid in Swiss Francs, Euros, Pounds, and Crowns. With the collapse of the everything from the Polish Zloty to the Serbian Dinar this one is truly gigantic.

It's sweeping over the nearly defenseless European regional banks and it will overwhlem the EU Central bank. The waves, like the one in 2004, will crash upon far far distant shores and spark homegrown banking tsunamis far away from the initial source.

I put 100% of my mad money in SDS on Feb 2. SDS is a ProShares ETF which attempts to keep its rise and fall at -2X of the S&P500. So it is an ultrashort fund. I was tempted to put some of it in SKF which is the same as SDS except based on the DOW financial index. Would have made a fortune if I had done it instead of just a generous increase. But after the Christopher Cox anti-short debacle of last September, I am afraid to gamble on anything which is so directly dependent on the exact nature of government intervention. Besides, the financial stocks are so flattened that one needs a microtome to slice them, which makes them more difficult to understand re speculation. And the final wipeout of C and BOA common equity is a given now and factored in.

But my question centers around the coming suckers' rally. Don't we need a little good news to spark it? I just can't see the good news. The coming sovereign collapse of eastern Europe which will result in the collapse of EU banks certainly isn't it. I just can't get my head around the herd instinct and lemming psychology of the suckers' rally.

@Darn Wabbits

Peru doesn't have rabbits. They like to eat guinea pigs which they call cui. They have restaurants specializing exclusively in cui called cuierias. They are partially deboned and flattened and have the texture of a truck inner tube.

Winthrop: “Damn! Knowing Blinky, he would be too proud to ask a friend to put them up. Let’s search the brambles.”

Lila: “I’ve gotta bad feeling about this”

Winthrop: “Look, we can be more effective if we get some help. Then we’ll search all of the warren.”...Back at school, OWB: “OK, I would like to ask group one to describe how the banks are an integral and necessary part of our Rabbit society and how they help us all.”

I agree that Europe is facing a worse and more immediate crisis than the US. And as we know how dire things are in the US that is really saying something. IMO the US dollar has the potential to skyrocket temporarily under these circumstances (although there will always be pullbacks along the way, and in fact one may be coming shortly).

As I said in my currency primer, I expect US dollar (and yen) strength initially, followed by a period of chaotic volatility and currency inter-relationships are violently disrupted by extreme fluctuations resulting from currencies blowing up or competitive devaluations. This will blow up the floating exchange rate system eventually (my guess is within 2 years), and will also precipitate huge losses in the derivatives market. 80% of the derivatives market is based on currency and interest rate bets, ad we haven't even begun to see what high volatility will do to those bets. It's going to expose the underlying counterparty risk quite abruptly, leading to a wave of defaults.

I think Europe is in a truly tragic predicament. It's hard to imagine from our current perspective just how divisive the coming disruption will be. European unity is a highly prized ideal, but is hardly reflective of Europe's past.

As awful as it is to contemplate, we are moving into an era of 'us versus them', where 'us' becomes ever more tightly defined and 'them' becomes an ever more pejorative term. 'Twas ever thus when there isn't enough to go around and there's a need to blame someone else in order to deflect blame from ourselves. Blaming someone else is always the path of least resistance. Initially it may be immigrants and society's weakest who unfairly shoulder the blame, but I think we will see much deeper divisions over time due to the conflicting regional priorities in Europe (and elsewhere).

I should make it clear that just because I am predicting this does not mean I am in any way in favour of a disintegrating Europe. I have always been a Europhile, unlike many Brits, and a great fan of multiculturalism, but I am also a student of human nature. The way people interact during expansionary times is very different than the way they treat each other during a rapid contraction when the rug is pulled out from under their feet. Peaceful and trusting people become suspicious, angry and finally violent.

Looking at the future through a lense of our present mental/emotional perspective is not helpful when it comes to understanding discontinuities. How we feel about tings now is not how we will feel about them then, although if we understand the human herding impulse it is much easier to resist herding behaviour. Emotions are almost unbelievably catching, but one needn't give into a developing mob mentality if one sees it for what it is.

The negative mindset that is coming will be profoundly unhelpful to every positive initiative that may be suggested. It will make everything worse than it need have been by undermining our propensity to cooperate. We will all need to hang on to that cooperative spirit deliberately in order to establish an sustain workable local solutions. It will be difficult, but worth it.

By way of example as to the difference mindset can make to how something awful plays out, it is interesting contrast the experience of Europe during two episodes of the Black Death. During the first outbreak in the 14th century, British society was brought to its knees as people trusted no one and abandonned even their own families. As people simply ran blindly, they carried the disease with them far and wide, vastly increasing the devastation.

During the later outbreak of the 17th century, the same disease had far less impact as people largely kept their heads. They worked together to institute a quarantine period that was highly effective in limiting the spread of the disease and reducing panic. While the disease itself was as devastating as ever, its effect on the social fabric was much less severe because people did the sensible thing. (For more on this for those who may be interested see The Return of the Black Death by Susan Scott and Christopher Duncan).

The more the social fabric stays together, the greater everyone's chances of coping with any kind of major threat. Cohesion can literally be a saviour, but it will be hard to maintain (and harder still in places where old animosities lie dormant, but could easily be revived by populist politicians looking for easy scapegoats). Hopefully those here who are forewarned will be better able to resist being sucked into a destructive mentality.

What is the general opinion of an IRA or 401(k) holding a money market fund consisting only of short-term Treasury Bills, such as Vanguard VMPXX or VUSXX.

I understand that an individual doesn't directly own these T-bills such as purchased directly thru TreasuryDirect. However, the money market fund is comprised of short-term T-bills, which are a safe security.

Going forward as the crisis worsens, would you cash out the IRA/401(k), paying the penalty and taxes?

What I am really asking, how safe are money market funds consisting only of short term T-bills?

2nd question - Are Credit Unions more or less at risk than banks for savings/checking accounts? A few credit unions have failed in the past, but when more banks start failing, would more credit unions also fail? Would there be bank runs at credit unions too?

Or do you recommend to stay away entirely from financial institutions, instead to rely on cash at home, and extra money in short term T-bills?

Considering Pritchard's comments about gold, do you still expect it will have a significant pullback soon?

Yes, I do. Perhaps not immediately, but I doubt if it will be long. I think silver will fall further though. Gold typically outperforms silver in a depression, as silver is primarily an industrial metal reflective of general economic health (or the lack of it).

But my question centers around the coming suckers' rally. Don't we need a little good news to spark it? I just can't see the good news. The coming sovereign collapse of eastern Europe which will result in the collapse of EU banks certainly isn't it. I just can't get my head around the herd instinct and lemming psychology of the suckers' rally.

No, we don't need any good news to spark a rally. In fact the news is usually at its blackest just before a rally starts and into the early days of a rally. The news reflects the preceding trend, with a time lag, so that it's more correct to say that the market drives the news than that the news drives the market. Actually, mood (greed versus fear) drives both, but the real world effects that are newsworthy take longer to develop than the effects in the markets, as financial decisions can be put into effect almost instantaneously.

Financial markets are thus a leading indicator of economic fallout. And economic fallout leads to internal political repercussions, with even more of a time lag. Internal political upheaval may then be followed by external political upheaval, in other words war.

The time to expect good new is near the peak of a rally. That's when many people have got over whatever doubt they may have about the rally and have begun to buy into it en masse. The news will reflect that optimism, even though it's completely ungrounded in reality. The news isn't about reality, it's about perception. People are collectively optimistic at peaks and pessimistic at troughs, and the news reflects this. Successful investors take a contrarian stance. They sell at times of great optimism and buy at times of deep despair.

Credit unions are not inherently safer than banks. You can ask a bank or credit union for their IDC rating, which will range from 1-300, with higher numbers being safer. Anything over 200 is very great, and 165-199 is very good. It's possible to check IDC ratings over the phone (for something approximating $50 I believe). You can also check a Veribanc rating for about $10.

See here for the FDIC list of bank rating and analysis services, complete with contact details.

The FDIC does not release its ratings on the safety and soundness of banks and thrifts to the public. There are private companies, however, that rate banks and thrift institutions. The FDIC Library staff has compiled the following list of bank ranking and analytical services as a resource guide for researchers. The list is divided into two major categories: bank ranking services and credit rating/analytical services. Database services, bank securities ratings, and bank rankings by phone are listed separately.

As for the question about cashing out an IRA/401(k) held in t-bills, that's a harder one. The tax penalty would be significant, and the assets class is very much safer than most. The losses are likely to be much less, although if your funds are mingled with those of others then there's a risk that the institution holding them could go bankrupt. Also, at some point the government is likely to prevent people from cashing out retirement savings, in order to stem a trickle that threatens to become a flood. The cashing out option will almost certainly be temporary.

This will blow up the floating exchange rate system eventually (my guess is within 2 years), and will also precipitate huge losses in the derivatives market.

I agree 100%, though I think two years is conservative. I think it will start with failures in smaller currencies and then roll to larger and larger. For example, I suspect that all of the Eastern European currencies and the currencies of the old Soviet satellites, especially any of the countries than end in 'stan', will be so much toilet paper. As folks crowd into the Euro, Dollar, and - gasp - even the Pound these will see short term strength. This is already happening due to the mortgages and loans mentioned. So short term, I agree 100%, that conversions into the larger currencies will make them all seem stronger.

Where I suspect it will crack is when one of the remaining "strong" currencies tries to establish itself as a regional reserve currency. I can't think of a time that multiple reserve fiats existed with no backing if gold, silver or something of intrinsic value. Can you? I don't think such a system (multiple regional reserve fiats) can exist without destablizing all fiat currencies.

Stoneligh wrote:

European unity is a highly prized ideal, but is hardly reflective of Europe's past.

As awful as it is to contemplate, we are moving into an era of 'us versus them', where 'us' becomes ever more tightly defined and 'them' becomes an ever more pejorative term.

I agree again 100%. I think we will see countries try to establish "blocks" or groups that have a common interest. This is also what preceded WWI and WWII.

Stoneligh wrote:

The more the social fabric stays together, the greater everyone's chances of coping with any kind of major threat.

Don't know if this is true. Towns that survived the black death relatively unscathed were the ones that barricaded themselves and threatened refugees and strangers to move on. (I do remember the town that was hit and voluntarily closed themselves off, leaving coins in pockets filled with vinegar in a big rock just outside the town. The neighboring town left food in return. All died, noble souls though they were).

Not sure how the black death translates to the unfolding situation, but I suspect in a fast crash trying to help your fellows on a collective basis may prove a less optimum survival strategy than going local to the town and neighborhood level. I may be biased as this is our survival strategy. Is yours different?

Addenum re: the black plague. The virulence and death rate in the 14th century was up to 80%. The wave that hit in the 17th century met descendents of the survivors of the 14th and the mortality rate was around 10% as I recall. So it was much less deadly. Evolution had selected away the genes of those more susceptible during the first outbreak.

This was probably why collective action was easier to achieve. The disease was less deadly as humans developed an immunity to it.

Worth watching is last week's interview with former Australian Prime Minister Paul Keating. He is reckoning on a default on Eurozone and US sovereign debt and is another voice calling for a "new Bretton Woods" that gives equitable voice to creditor nations... EU and US won't let it happen of course, unless things get REALLY bad.

Regarding the markets: I dumped all my shorts on Thursday. Whereas I was previously expecting us to break through 750 on S&P and descend to a new low, for some reason I got a strong feeling that we would bounce off the 750 level and start the next bear market rally. Take it for what it's worth. So far, so good. I have no idea what will spark a rebound, but I expect one nonetheless. It will probably be weak, maybe only back up to 850.

Regarding the situation in Eastern Europe: at the moment I am guessing that it will prove to be the event that terminates the bear market rally we may start on Monday - in other words, it may hold off for a month or so. When it comes down, the rally will fizzle and we will see a new lower low.

Stoneleigh's aphorism on news and rallies is perceptive enough that it can be called Stoneleigh's Law.

There's a Tuchman's Law:"The fact of being reported multiplies the apparent extent of any deplorable development by five- to tenfold. Disaster is rarely as pervasive as it seems from recorded accounts. The fact of being on the record makes it appear continuous and ubiquitous whereas it is more likely to have been sporadic both in time and place. Besides, persistence of the normal is usually greater than the effect of the disturbance, as we know from our own times. After absorbing the news of today, one expects to face a world consisting entirely of strikes, crimes, power failures, broken water mains, stalled trains, school shutdowns, muggers, drug addicts, neo-Nazis, and rapists. The fact is that one can come home in the evening, on a lucky day, without having encountered more than one or two of these phenomena."

I started with SDS, but the trading range low is the same with the S&P at 750 as it was with the S&P at 1300. This is beyond my noodles comprehension. I figure with the percentage change it makes more sense to short it with put options, to ride the suckers rally, but that is playing with fire.

You may well regard preserving your wealth today as much more important than tax-deferred status over the next however-many years. Also factor in how stable you regard the tax laws, the currency, or the government itself. Can you really do long-term planning at this point?

If you are still employed and are in a higher tax bracket, the 10% penalty is painful (which is the whole idea). If you are newly unemployed, you will be dropping into a lower tax bracket and the 10% penalty is not much of an issue - you basically sheltered the income for a while.

On the other hand, if you are considering pulling $100,000 or more out of your account in one tax year, you will be right back in the top bracket.

A compromise might be to use the safest option available to you in your account, reduce (if your company is still matching) or eliminate your new contributions, then take no other actions until/unless you lose your job. Then tap your retirement funds as needed for living expenses to keep the tax bite down, while you do the best you can to protect your other assets.

* Don't buy a house yet - much further to fall* Fabulous, beautiful sculpture* Banking system could fall apart in 2 years or tomorrow* $25 Trillion in admitted debt* Bye, bye, big three* What is really going with Obama?* T-bills are better than FDIC insured deposits (for now)* Europe in more trouble than US - expect bank failures* European failures will have ripple effect to US* SDS has done well, SKF better, but watch out for fool's rallies* No rabbits in Peru* Blinky gets evicted and is lost, possible moved to Peru* Gold and silver will fall back pretty soon* Dollar will rise for a while as a safe haven* Expect currency volatility and eventual failure of exchange rate system* Era of 'us' vs. 'them' ahead* Stoneleigh's law: Mood drives news and markets but news lags markets.* Credit unions not necessarily safer than banks.

Stoneleigh's aphorism on news and rallies is perceptive enough that it can be called Stoneleigh's Law.

I'm not the first to hold this view of news and rallies. For much more detail on social mood as a driver, and the complex interactions between events and psychology, check out Bob Prechter's socionomics. He's been working in this field since the late 1970s if memory serves (being quite a bit older than I am).

Towns that survived the black death relatively unscathed were the ones that barricaded themselves and threatened refugees and strangers to move on. (I do remember the town that was hit and voluntarily closed themselves off, leaving coins in pockets filled with vinegar in a big rock just outside the town. The neighboring town left food in return. All died, noble souls though they were).

You are thinking of Eyam in Derbyshire. It's true that 90% of that particular village died. As it happens I've been there and seen the graveyard. (Roy Bailey used to sing a beautiful song about it called The Roses of Eyam.)

On the whole though, society was much better organized to fight the scourge than it had been earlier. It went far beyond one small hamlet of 300 or so people deciding to self-quarantine. A 40 day quarantine period was strictly enforced in many places, which required a level of cooperative organization that had been completely lacking in the 14th century.

Not sure how the black death translates to the unfolding situation, but I suspect in a fast crash trying to help your fellows on a collective basis may prove a less optimum survival strategy than going local to the town and neighborhood level. I may be biased as this is our survival strategy. Is yours different?

I was merely pointing out that a similar event can have very different consequences depending on people's collective response to it. Contrary to popular belief, the plague was no less virulent the second time around. Although some genetic resistance had developed, it was by no means enough to explain the difference in death rates between the two outbreaks. (FWIW I used to be a biologist.)

I agree that cooperative efforts will inevitably be focused at the local level, as cohesion is far more likely to break down at higher levels of organization. The more local your efforts, the greater the chance that they will succeed, as it will be much easier to maintain trust between people who know each other personally. The more trust there is before things get difficult, the better, as building trust during a great upheaval is even harder than maintaining it.

John Mauldon is suggesting that the EU and Euro are in significantly more peril than most in the US acknowledge. With that in mind, there was a suggestion that a Sunami not a Ripple effect from currency instability could move west from Europe quicker than most would consider. Hope the powers that be are as aware as I hope they are, and are preparing accordingly. Like many who read here daily, I too prepare the best I can. I appreciate the faithfulness of I&S and many who comment frequently. John

That link worked for me,“Soros sees no bottom for world financial "collapse"

NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system."We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain."I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary “

Stoneleigh and GreenMan - Thank you both for your responses regarding pulling money from 401k/IRA.

I'm old enough that I wouldn't have the penalty, however, the tax bite would be bad. My concern is the safetyness of a Vanguard or Fidelity MMF consisting of short term T-bills.

Yes T-bills are safe, but how safe is the money market fund? Is it possible that people's T-bills in MMF couldn't be used to purchase risky securities for a different fund? What prevents Vanguard or Fidelity from doing a Madoff or a Stanford? How does anyone know if their MMF fund company and manager are reliable before it's too late?

If it weren't for the tax bite, I would pull the money out now from the MMF. But if the fund has been used fraudulently, there might not be any money there in the future.

When there is nothing in the news, it's assumed Vanguard and Fidelity are reliable. But people thought Madoff and Standford were reliable too.

Have you considered a self directed checkbook ira (there may be a 401k option as well)? I don't have enough to make it worthwhile, but you can gain checkbook conrol and make the transfer without penalty.

YD - Yes, I have an electronic option to transfer from the IRA to a checking account at a credit union. And there would be no penalty because I am older than 59 1/2. I would just have the tax bite, so haven't withdrawn anything yet.

But my basic question...I know Treasury Bills purchased via TreasuryDirect are safe and personally titled to me. But is a money market fund of T-bills just as safe even though my portion is not directly titled to me?